tag:theconversation.com,2011:/ca/topics/libor-3331/articlesLIBOR – The Conversation2018-02-25T20:18:47Ztag:theconversation.com,2011:article/922952018-02-25T20:18:47Z2018-02-25T20:18:47ZLIBOR: elections, manipulations – and a possible fix<figure><img src="https://images.theconversation.com/files/207522/original/file-20180222-152363-13zyo3f.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">London&#39;s financial district at night.</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/NaWJWzmprZQ">Gordon Williams/Unsplash</a></span></figcaption></figure><p>While some first political and economic consequences of the <a href="https://theconversation.com/uk/eu-referendum-2016">Brexit vote</a> are already visible, London’s role in the world financial markets has been so far relatively unaffected. The high density of financial institutions combined with a longstanding tradition of the banking industry makes the role of the City in the financial arena rather stable.</p>
<p>Among the several indexes located in this financial powerhouse is the <a href="https://www.theice.com/iba/libor">ICE London Interbank Offered Rates</a> – commonly known by its acronym, LIBOR. Since the <a href="https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-number">2008 rigging scandal</a> there has been some discussion of <a href="https://www.theguardian.com/business/2017/jul/27/libor-interest-rate-phased-out-scandals">phasing it out</a>, but it remains a key index in the world’s financial markets.</p>
<p>Each LIBOR rate determines the interest rate at which banks lend each other money for some length of time (ranging from 1 day to 12 months) on different currencies (dollars, euros, etc.). These benchmark rates are widely used as a base interest rates by financial institutions all over the world since many contracts are paid at least the interest corresponding to some LIBOR rate.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=405&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=405&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=405&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=509&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=509&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=509&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 1: Two LIBOR rates since 2008: EUR at 12 months and USD 3 months.</span>
<span class="attribution"><span class="source">St. Louis Fed.</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Therefore, the LIBOR rates impact directly and indirectly small businesses as well as corporations, the world’s largest banks and almost any financial product such as loans, mortgages and derivatives. Arguably, the LIBOR rates are among the world’s most important numbers. It is often thought as a good barometer of the global economic and financial situation. </p>
<p>Figure 1 depicts the evolution of two of these rates since 2008: the one corresponding to loans in euros for 12 months and the one corresponding to loans in US dollars for three months. One can distinguish clearly three different regions. In first one, spanning from the beginning of 2008 until mid 2010, where both indexes are in decline, corresponds to the aftermath of the subprime financial crisis. The second period, that ends at the beginning of the year 2015, corresponds to some stable period in which both rates do not move much the EUR12 being higher than the USD3 one. The final region, that lasts until today, corresponds to an unusual period in which the EUR12 is negative while the USD3 is positive and increasing. What can one infer from these indexes ? How is each index determined?</p>
<h2>Elections and manipulations</h2>
<p>A distinct feature of these rates is that its value is not determined through a market but through an election. More precisely, a daily election is held in which a selected sample of 18 banks takes part. Each bank reports a value (interest rate) which represents the rate at which it is ready to lend money in this currency for certain amount of time. The extreme reports (the top and the bottom four) are removed and the LIBOR corresponds to the average of the remaining values. Figure 2 explains this computation with five banks and the deletion of the top and the bottom value.</p>
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<img alt="" src="https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=154&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=154&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=154&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=194&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=194&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=194&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 2: Example of LIBOR computation with five banks.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The logic of the LIBOR computation is made transparent in Figure 2: the first step, dropping the extreme reports, invalidates the extreme reports whereas the second one simply averages the moderate ones, leading to a LIBOR of 0.527%. The role of the second step is to represent in a consensual manner the moderate values. In a sense, one could argue that this method tries to give incentives for consensus since none of the banks has an interest in announcing a value too different from the rest of the announcements. Yet, since the financial crisis in 2008, manipulation in the LIBOR (often referred to as the LIBOR scandal) casts some doubts over the way this index is determined.</p>
<p>In the 2008 LIBOR scandal, some banks altered their reports so as to obtain a value that fitted better their own interests. For instance, a report by the United Kingdom Financial Services Authority (FSA) <a href="https://www.fca.org.uk/news/press-releases/barclays-fined-%C2%A3595-million-significant-failings-relation-libor-and-euribor">stated that</a>:</p>
<blockquote>
<p>“Barclays’ misconduct was serious, widespread and extended over a number of years. The integrity of benchmark reference rates such as LIBOR and EURIBOR is of fundamental importance to both UK and international financial markets. Firms making submissions must not use those submissions as tools to promote their own interests”.</p>
</blockquote>
<p>If every bank announces honestly its preferred interest rate, this method is arguably close to perfect. However, a reasonable question is whether banks have the incentives to do so under this method. If not, this casts some shadow over this manner of computing LIBOR.</p>
<p>To understand the logic of a manipulation in a simple manner, consider that in Figure 2 every bank is honestly announcing its preferred interest rate. For instance, this implies that Société Generale’s preferred rate is 0.52%. What is the consequence of a misreport with this system? As long as the report is not too extreme, that is located in between the ones of Rabobank and Crédit Suisse, a misreport (or strategic report) affects the outcome. If for instance, S.G. announces 0.499, then the final outcome is 0.52: namely, by misreporting, S.G. obtains its preferred rate (see Figure 3 for an explanation). This leads to the following conclusion: the classical method for computing LIBOR gives banks incentives not to report their preferred interest rate but rather to strategise as a function of the expected reports of the rest of the banks.</p>
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<img alt="" src="https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=146&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=146&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=146&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=183&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=183&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=183&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 3: A misreport might be beneficial for a bank.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>A proposal</h2>
<p>Can we find reasonable ways of building the LIBOR rate without this undesirable feature? One can always design sophisticated methods to check whether the reported values are indeed sincere, yet this comes at the cost of thin auditing methods which can be rather inefficient. Yet, this method will still lie in the setting in which banks are always tempted to manipulate the true valuation, which might in turn create new problems with fake reports. Our view is that the purpose of the LIBOR method is to design a method which is simple and practical while at the same time it represents well the different preferences of the banks. Namely, if one wants to improve the computation of the LIBOR, one needs to design an instrument that moderates the final decision while it leads to a consensual final rate.</p>
<p>This <a href="https://www.sciencedirect.com/science/article/pii/S0022053117300558">has led us to design methods</a> that escape from the dilemma of reporting the true value versus manipulating via reporting a strategic value. One of these methods works as follows: each bank reports a range of values and not anymore, as in the original LIBOR, a single value. Namely, rather than reporting 0.52 and 0.499 as in Figures 2 and Figure 3, the Société Générale is now allowed to announce any range of interest rates: for example, in Figure 4, S.G. announces any value from 0.231 until 0.841. This means that S.G. approves of any value in this interval.</p>
<p>The interval method computes the LIBOR in a different manner. Rather than dropping values, it considers the different intervals announced by the different banks as a sample of points (see Figure 4b). Given this sample of points, it plots the distribution of the approvals made by the different banks (Figure 4c). Finally, it selects the value that divides in two exact halves the sample of points generated by the banks’ announcements.</p>
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<img alt="" src="https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=395&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=395&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=395&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=497&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=497&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=497&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 4: Computing the LIBOR with intervals.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>How should we expect banks to behave under this method? Theoretically, this method should lead to selecting (a very accurate estimation of) the median preferred interest rate of the banks. The idea behind the median interest rate is quite familiar in economics and political science: the Condorcet winner. Consider the ideal point of each bank and order them from the lowest to the highest one. The median interest rate is the one that divides the sample of ideal points in two exact halves since half of these values are lower than the median interest rate and half are higher. An important property of the median interest rate is its democratic appeal: it turns out that if one starts comparing by pairs each of the ideal points of the different banks, the only interest rate that defeats by a majority any other ideal point is the median interest rate. It is hence a basic desideratum for respecting the will of the banks to ensure that the outcome is as close as possible to the median of the ideal points.</p>
<p>This convergence to the median should occur since a bank’s ideal strategy is to announce either all the interest rates to the left of the outcome or all the alternatives to the right of it. The bank should theoretically announce all alternatives located to the left of the outcome if its interest rate is lower than the outcome whereas it announces all alternatives to the right of the outcome if its ideal interest rate is higher. In practice, few are known. </p>
<p>Some experiments have been run in the Cyprus Experimental Economics Lab at the University of Cyprus, and while it is still early, the first available results are encouraging. In a lab setting, we endow players with a minute to decide over the interval they want to announce. During this period of time, they are allowed to play with the intervals while seeing in real-time the announcements of the rest of the players. Most experimental subjects tend to understand well the mechanism and the outcome is quite close to the median of the players’ ideal points. More importantly, players seem to be much more satisfied with the final outcome than with the usual methods so that the method increases the consensual views of the different players.</p>
<h2>Final remarks</h2>
<p>The LIBOR rates are core tools in the global financial system. It is then essential to ensure that these rates are well-calibrated so that they reflect well the will of the different banks involved in its construction. While the LIBOR scandal underlined some weaknesses in the initial method of computation, a myriad of possible fixes might be available. Our proposal is to offer each of the banks more flexibility, allow each to announce ranges of interest rates. While more evidence is needed on the benefits of this system, the current <a href="https://www.sciencedirect.com/science/article/pii/S0022053117300558">theoretical and experimental results</a> make this approach a potentially interesting one. A key advantage is that banks would no longer face the usual dilemma between being sincere or opting for their self-interest, removing any potential auditing costs.</p><img src="https://counter.theconversation.com/content/92295/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The London Interbank Offered Rates is one of the world's key financial tools, but the 2008 rigging scandal has led to calls for its being phased out. Can we find better ways of building the LIBOR rate?Matias Nunez, CNRS Researcher in Economics, Université Paris Dauphine – PSLDimitrios Xefteris, Assistant Professor of Political Economy, University of CyprusLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/820192017-08-07T14:03:29Z2017-08-07T14:03:29Z'The day the world changed' – a former trader on how the credit crunch kicked off<figure><img src="https://images.theconversation.com/files/181230/original/file-20170807-25565-i55vam.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>When I received a phone call from a trader colleague at Merrill Lynch on August 9 2007, I was in the middle of chopping wood in the Swedish countryside. As always, I had my mobile on me in case of an emergency. </p>
<p>I answered the call to a frenzied account of an extraordinary development in the financial markets. My colleague kept repeating that things were “crazy” and “completely mad”. At the time, there was nothing in what he said that made me worried about my trading position, let alone the global financial system. Rather, it was the market prices, quotes and numbers that he listed that did not make sense at all. </p>
<p>Put together, it seemed as if all banks, suddenly, had become desperate for cash. The reason soon became apparent: French bank BNP Paribas had barred investors from accessing money in funds with subprime mortgage exposure, <a href="https://www.ft.com/content/9a4cabc4-464d-11dc-a3be-0000779fd2ac">citing</a> a “complete evaporation of liquidity”. It was the start of the credit crunch. </p>
<p>A financial crisis tends to be associated with fears of a bank run. Picture long queues outside banks, such as during the Great Depression following the 1929 Wall Street crash. If customers desperately begin to withdraw their deposits from a bank, it can quickly turn into a self-fulfilling prophecy. If you think that others will become afraid that the bank will run out of cash, it might be rational to empty your own savings account first. And so, for many, scenes of long queues outside branches of UK bank Northern Rock <a href="http://www.telegraph.co.uk/news/uknews/1563266/The-Northern-Rock-crisis-explained.html">in September 2007</a> is still their earliest memory of the credit crunch and the global financial crisis.</p>
<p>Before the fear of a bank run spreads to the public, however, the atmosphere on the trading floors has already changed. Trading turns into a situation in which the hot potato is passed around from trader to trader, from bank to bank. Lending money is a risky business and nobody wants the borrower to default. As a precaution, banks desperately try to borrow money from the others before they stop lending. Nobody wants to get burnt by being left holding that hot potato. </p>
<p>Parts of the money markets had already begun to dry up with the demise of the US sub-prime mortgage market <a href="http://www.nytimes.com/2007/02/23/business/worldbusiness/23bank.html">around February 2007</a>. Some hedge funds and lenders had reported serious losses – and this malaise had spread to European markets. Then followed <a href="http://www.reuters.com/article/us-bnpparibas-subprime-funds-idUSWEB612920070809">the news</a> that BNP Paribas had frozen €1.6 billion of funds, citing US subprime mortgage sector problems. </p>
<p>BNP had always played a big role in the trading community and had made markets in everything I traded: foreign exchange, bonds and interest rate derivatives. They were also French – and the French banks were famous for hiring the best programmers and mathematicians as analysts and traders. If they did not know how to value their portfolios, who did? When I received the phone call, the news flash had just happened and the game of musical chairs had begun.</p>
<p>Being a short-term interest rate trader had not been particularly glamorous before August 9 2007. Our desk traded a range of instruments that were important for the financial system, but not interesting and complex enough to represent the forefront of financial innovation. Other trading desks enjoyed considerably more prestige. Then everything was turned upside down. </p>
<p>Suddenly, the spotlight fell on us. Everything we did had a direct link to the money market between banks and the benchmark linked to it, <a href="https://theconversation.com/the-scandal-might-be-over-but-libor-ethics-remain-fundamentally-flawed-77412">LIBOR</a>, so our desk evolved into a place people turned to in order to get an idea of what was going on with the market. Which bank was rumoured to be in the worst shape? Which bank seemed most desperate to borrow? Which bank had been ordered to throw in the towel and temporarily suspend its market-making activity? Which bank had refused to deal with which other bank for fear of insolvency? </p>
<p>The rest is, of course, history: the collapse of the bank Lehman Brothers in September 2008 and the most severe financial crisis since the Great Depression (not to mention the <a href="https://theconversation.com/qanda-what-is-the-libor-scandal-and-why-does-it-matter-45662">LIBOR scandal</a>). Even today, central bankers, regulators and other policy makers talk about measures that ought to be taken to avoid another “Lehman moment”. What they refer to is a situation in which the entire global financial system is on the brink of total collapse. </p>
<p>August 9 2007 will not go down in history as the day the world ended. Rather, to cite the former <a href="https://www.theguardian.com/business/2011/dec/01/credit-crunch-pinpointed-august-2007">Northern Rock boss Adam Applegarth</a> it will be remembered as the “day the world changed”.</p><img src="https://counter.theconversation.com/content/82019/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexis Stenfors is the author of Barometer of Fear: An Insider’s Account of Rogue Trading and the Greatest Banking Scandal in History.</span></em></p>Recalling August 9 2007 – the start of the credit crunch and global financial crisis.Alexis Stenfors, Senior Lecturer in Economics and Finance, University of PortsmouthLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/774122017-05-12T12:07:31Z2017-05-12T12:07:31ZThe scandal might be over but LIBOR ethics remain fundamentally flawed<figure><img src="https://images.theconversation.com/files/169117/original/file-20170512-3664-16t9dx6.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>When I was a trader at HSBC, Citibank, Crédit Agricole and Merrill Lynch, being able to accurately predict the the <a href="https://www.theice.com/iba/libor">London Interbank Offered Rate (or LIBOR)</a> each day was a central part of my job. It was, and still is, the most important benchmark in finance – underpinning derivatives worth trillions of dollars. Predicting the number correctly was lucrative. Predicting it incorrectly could often be disastrous. </p>
<p>To guess the rate correctly, an endless list of things had to be taken into account. When would central banks change their interest rates? In what direction and by how much? What was already anticipated by the market? What could influence the central bankers’ decision going forward? The inflation rate, certainly. But a range of other factors also mattered: the unemployment rate, retail sales, household consumption, the exchange rate, etc. During crises, the ability of banks to borrow money also mattered, as well as how this ability (or inability) was judged to change in the future. </p>
<p>LIBOR was like a puzzle that never could be solved completely. Some days you might get very close, or even be spot on. But then, the next day arrived with a new box of jigsaw pieces and you had to start all over again. For me, it was one of the most intellectually stimulating parts of being a trader. </p>
<p>But it also became a daily source of irritation. This was especially the case if you were a trader not working for one of the banks involved in setting LIBOR (the benchmark is taken from the average rate that a panel of banks say they are willing to lend to each other), or not seated physically close to one of the traders responsible for inputting the numbers – both of which were true in my case. LIBOR sometimes appeared to be deliberately skewed in one direction or the other: high when I bet on it to be low or low when I bet on it to be high. </p>
<p>This got worse in the years building up to the financial crisis, as bank staff (<a href="https://www.zedbooks.net/shop/book/barometer-of-fear/forthcoming/">including myself</a>) increased their <a href="http://voxeu.org/article/excessive-risk-taking-banks-new-ereport">risk-taking activities</a> exponentially. The jigsaw puzzles got bigger and bigger– and the desire to solve them did too. The crisis itself did not act to reduce risk-taking behaviour. It did, however, turn my irritation with LIBOR into frustration. To me, LIBOR seemed to have become more and more incorrect.</p>
<p>When the financial crisis erupted, everything I did as a trader revolved around fear, or what the former chairman of the Federal Reserve, Alan Greenspan <a href="https://files.stlouisfed.org/files/htdocs/publications/es/09/ES0924.pdf">coined</a>: “the barometer of fears of bank insolvency”. He argued that LIBOR, when put in a specific context, was a kind of fear index related to banks. But I remember how surprised I was when talking to central bankers about LIBOR at the time, about the fear they were trying to fight. For different reasons, what’s <a href="https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-number">been called</a> the “world’s most important number” had become extremely important to them and they, too, were desperately trying to solve the jigsaw puzzle – but often failed to understand exactly how it was calculated.</p>
<p>But what could be done? LIBOR was not regulated. Neither was it overseen by the central banks. Instead, the rules of the game were in the hands of a small handful of banks <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/191762/wheatley_review_libor_finalreport_280912.pdf">and a lobby working on their behalf</a>.</p>
<h2>Notes on a scandal</h2>
<p>The LIBOR scandal – the discovery that LIBOR had been systematically manipulated by banks – <a href="https://www.ft.com/content/e82cf02c-dd80-11e6-86ac-f253db7791c6">erupted in 2012</a>. Since then, efforts have been made to safeguard against manipulation and collusive practises in relation to setting the number. Banks have been fined billions for their involvement and tried to install better ethics into their organisational cultures, with terms such as <a href="https://www.fca.org.uk/news/speeches/conduct-risk-briefing">“conduct risk”</a> becoming a new buzzword. </p>
<p>The British Bankers Association, the bank lobby – which used to oversee the LIBOR fixing mechanism together with the banks themselves – is <a href="https://www.theguardian.com/business/2012/sep/25/bba-libor-setting-role-stripped-banks">no longer involved</a>. The process is now regulated by the Financial Conduct Authority and LIBOR manipulation has <a href="https://www.gov.uk/government/news/chancellor-confirms-manipulation-of-key-forex-benchmark-to-be-made-a-criminal-offense">become a criminal offence</a>. Steps have been taken to put things right.</p>
<p>But despite a <a href="https://www.theguardian.com/business/2013/apr/02/libor-regulations-rate-rigging-scandal">string of regulatory changes</a>, the puzzle continues to evoke irritation, frustration and fear – for different reasons. Traders are irritated by the army of compliance officers now occupying their dealing rooms, and “banker bashing” <a href="http://www.bbc.co.uk/news/business-22382932">has hardly diminished</a>. Members of the public are frustrated by the fact that no senior bankers have been held to account for the LIBOR scandal, let alone the financial crisis. Regulators are frustrated by <a href="http://blog.applied-corporate-governance.com/ethics/banking-culture-review-a-worthy-but-doomed-effort/">slow progress</a> towards an ethical banking culture. </p>
<p>Meanwhile, those that have been investigated, prosecuted, sentenced – or are waiting for that to happen to them – live in fear of ending up as fall guys for a <a href="https://theconversation.com/libor-one-man-found-guilty-but-culture-change-is-still-needed-in-financial-sector-45634">system or culture</a> in which they were actively participating and contributing to – <a href="http://www.telegraph.co.uk/finance/comment/kamal-ahmed/7891774/The-financial-crisis-blame-game-have-we-got-it-right-in-just-blaming-the-bankers.html">yet did not, themselves, create</a>.</p>
<p>Perhaps the question, then, is not so much whether the changes that have been introduced are sufficient to prevent future scandals, but whether LIBOR is a puzzle that is impossible to solve in and of itself.</p>
<p>The issue with LIBOR has always been ethics. Or the lack of them.</p>
<p>LIBOR manipulation was unethical, even though the process lacked regulation and legal precedents. It was unethical, regardless of whether it was widespread or maybe even encouraged by senior management. LIBOR manipulation was unethical, even if, as suggested by a <a href="http://www.bbc.co.uk/news/business-39548313">recent BBC Panorama investigation</a>, officials at the Bank of England knew about it. But then it was embedded in an unethical culture. </p>
<p>Perhaps we should ask ourselves a more difficult question: can betting on LIBOR, betting on the “barometer of fear” or betting on the health of the global financial system ever be considered ethical?</p><img src="https://counter.theconversation.com/content/77412/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexis Stenfors is the author of Barometer of Fear: An Insider’s Account of Rogue Trading and the Greatest Banking Scandal in History.</span></em></p>LIBOR continues to evoke irritation, frustration and fear – for traders, central bankers and the public.Alexis Stenfors, Senior Lecturer in Economics and Finance, University of PortsmouthLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/597452016-05-20T07:04:05Z2016-05-20T07:04:05ZBanking excuses wearing a bit thin<p>Brain Hartzer, the CEO of Westpac, <a href="http://www.smh.com.au/business/banking-and-finance/westpac-chief-brian-hartzer-asics-got-it-wrong-20160406-gnzvpd.html">gave an excuse to the media</a> when asked about allegations that Westpac traders deliberately manipulated the important Bank Bill Swap Rate (BBSW) benchmark, saying that it was a heavy trading day “after an Easter long weekend”.</p>
<p>Unfortunately, Mr Hartzer has been proved wrong by a set of <a>submissions</a> made by the Australian Securities and Investment Commission (ASIC) to the Federal Court, in relation to its case against Westpac for manipulating the BBSW. </p>
<p>On April 6 2010, which was indeed the day after Easter Monday, trading was pretty brisk, especially in the 30 day BBSW rate, but 100% of the trading was by Westpac’s treasury group. According to the very detailed data released by ASIC, Westpac traders bought around A$2 billion of bank bills, mainly within the five minute window that determined the BBSW rate.</p>
<p>Mr Hartzer would have us believe that buying so many “yards” of bills was par for the course, and all part of the bank’s sophisticated risk management (or that is what he has been told). Mr Harzter claimed that:</p>
<blockquote>
<p>“We think there are perfectly reasonable explanations as to what that could refer to.”</p>
</blockquote>
<p>Maybe it was purely coincidental that being the only buyer on the day, <a href="http://www.investopedia.com/terms/y/yield.asp">the yield</a> on <a href="http://www.investopedia.com/articles/investing/070313/introduction-commercial-paper.asp">30 day ‘paper’</a>was <a href="http://www.investopedia.com/terms/d/depressed.asp">depressed</a> and as a result the BBSW rate. This was based on the consensus of prevailing yields in the market, which was also depressed, ending up at the bottom of the trading range. </p>
<p>Also apparently coincidentally, Westpac had had a massive <a href="http://www.investopedia.com/terms/s/shortselling.asp?o=40186&amp;l=dir&amp;qsrc=999&amp;qo=investopediaSiteSearch&amp;ap=investopedia.com">‘short’</a> position in their treasury book that day and the merely cutting the BBSW yield by a few basis points made the bank some A$12 million, as the trader responsible boasted to a colleague in a phone call filled with the usual expletives and jargon:</p>
<blockquote>
<p>“Yeah, no, we made about 12 million bucks today, right, so that’s, it’s not, that’s what you call a good day right?… a good day and maybe make a bit — we had a massive rate set today - had like a f–ing $14 billion of one month … I had to buy like I bought like f–k - I had $14 billion of one month”. </p>
</blockquote>
<p>Amazingly, ASIC reported another 14 instances where the stars magically aligned and Westpac treasury made a lot of money out of “guessing” the rate at which the BBSW rate would land and make them a profit. While it didn’t stop them, the traders expressed some misgivings </p>
<blockquote>
<p>I know it’s completely wrong but, I knew it was completely wrong but fuck it I might as well, I thought fuck it. We’ve got so much money on it, we just had to do it, right. It just had to be done. Some things in life have to be done, right?</p>
</blockquote>
<p>Like its overseas equivalent, <a href="https://theconversation.com/au/topics/libor">LIBOR</a>, the BBSW benchmark rate is <a href="http://www.afr.com/business/banking-and-finance/why-australias-bank-raterigging-matters-20160406-gnzxmh">not an esoteric anomaly of the financial industry</a>. It is the rate at which many commercial loans get set for the next quarter. The Westpac traders recognised who got hurt by artificially moving the BBSW rate up or down:</p>
<blockquote>
<p>“That’s my biggest fear and that’s what I will express to them… it’s not so much the interbank counterparties because I don’t care about them - they’re professional, they know what they are doing. It’s just more, it’s the unprofessional, unknown random you know with that $50 million of debt that’s getting stitched up by his bank getting a 15th rollover that at some point wakes up and has a dummy spit and quite deservedly so…that’s our biggest concern it’s more a reputation amongst that crowd of people rather than the interbank professionals who you know who probably spend half their life trying to stitch people up.”</p>
</blockquote>
<p>In the financial markets, so-called “Prime Banks” such as the Big Four, are literally able to print money (by issuing bills at preferential market rates) but in return are expected to play their part by ensuring an orderly market- that is the ‘quid pro quo’. However, it appears there was lots of ‘quids’ with the banks but not much ’quo’.</p>
<p>The banks involved, currently Westpac and ANZ, insist that we just don’t understand and it’s all part of the way the markets work. In that they may be right, but it is very far from how the market should work as embodied in the Australian Financial Markets Association (AFMA) Code of Conduct, to which the banks all subscribe and incidentally provide members to the association’s major committees. </p>
<p>Manipulation of financial benchmarks is taken much more seriously overseas. In the United Kingdom manipulation of benchmarks is a criminal offence, punishable with up to seven years in prison, for making “misleading statements or misleading impressions, or carrying out any course of conduct, in connection with the setting of a relevant benchmark.” </p>
<p>And, in the European Union, manipulation of a benchmark will become a criminal offence when the new <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0057">Market Abuse Directive</a> which starts on July 3. New legislation in Canada proposes that offences relating to the manipulation of benchmarks be “punishable by a fine or by imprisonment for a term of not more than 5 years, or by both.”</p>
<p>In 2015, as a result of an <a href="https://www.fbi.gov/washingtondc/press-releases/2015/five-major-banks-agree-to-parent-level-guilty-pleas">FBI investigation</a>, five major banks were handed criminal fines totalling almost US$3.5 billion for “conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market.” This follows fines on banks worldwide totalling over $13 billion for <a href="http://riskbooks.com/systemic-operational-risk-theory-case-studies-and-regulation">manipulation</a> of the LIBOR interest rate benchmark rate. </p>
<p>So governments and regulators around the world have determined that going forward, any attempt to mislead, engage in dishonest conduct, make a false or misleading statement, or give a misleading impression in relation to a financial benchmark should be a criminal offence, with jail and fines for those found guilty.</p>
<p>But what of Australia? </p>
<p>One of the reports in the new government’s in-tray (or probably the too-hard basket) is one on financial benchmarks, <a href="http://www.cfr.gov.au/media-releases/2016/mr-16-01.html">prepared by the Council of Financial Regulators</a> (CFR), the body that includes ASIC, the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia. The report proposed that two new benchmark manipulation offences be introduced to criminalise the following types of behaviour:</p>
<blockquote>
<p>“(a) making false or misleading statements (including by providing false or misleading data) in connection with the determination of a benchmark; and (b) engaging in dishonest conduct in relation to, or conduct that has or is likely to have the effect of creating or causing the creation of a false or misleading appearance with respect to trading (or the price for trading) in financial products that affects, the determination of the benchmark (whether alone or in combination with other conduct of the same kind, whether by the same or different persons).”</p>
</blockquote>
<p>While it is not suggested that application of the CFR proposals should be retrospective, it is nonetheless worth considering the claims that ASIC have made against ANZ and Westpac (and may be about to make against other banks) for manipulating BBSW benchmark could be classified as criminal behaviour by the CFR going forward. Then surely it was serious misconduct (if not yet criminality) at the time?</p>
<p>The usual arguments against regulatory action are being trotted out by the banks, such as the claim that any prosecutions will deter foreign investors. And apparently any criticisms of banks will undermine the public’s perception of the banking system. </p>
<p>But the public’s perception of banks could hardly be worse than the banks’ perception of each other, leaving the last word to a Westpac trader:</p>
<blockquote>
<p>“ I got it down to 23. But I got it from f–ing Goldman Sachs - gave me $300 million. I hate those f–kers as well - Goldman Sachs… I know I have got limit - I just wanna - I’m gonna just trash them on Friday.”</p>
</blockquote><img src="https://counter.theconversation.com/content/59745/count.gif" alt="The Conversation" width="1" height="1" />
With all the weight of evidence stacked against the banks in the case of BBSW benchmark, surely now is the time for the government to enforce regulation.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/558262016-03-09T03:29:56Z2016-03-09T03:29:56ZWhy rigging of the bank bill swap rate hurts everyone<figure><img src="https://images.theconversation.com/files/114386/original/image-20160309-22143-qclfsp.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Former ANZ chief Mike Smith remains as a &#39;non-executive advisor&#39; to the bank&#39;s board.</span> <span class="attribution"><span class="source">Sam Cardwell/AAP</span></span></figcaption></figure><p>ANZ Bank’s alleged <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/15-060mr-asic-commences-civil-penalty-proceedings-against-anz-for-bbsw-conduct/">manipulation of the bank bill swap reference rate</a> (BBSW) is Australia’s version of the LIBOR debacle.</p>
<p>The workings of BBSW, like <a href="https://theconversation.com/qanda-what-is-the-libor-scandal-and-why-does-it-matter-45662">LIBOR</a>, make for a very complex story. BBSW is similar to LIBOR (London Interbank Offer Rate), in that it’s used to set rates on hundreds of trillions of dollars (yes, hundreds of trillions) worth of transactions, including interest rates on credit cards, student loans and mortgages. </p>
<p>Banks also use the swap rate to determine the cost of borrowing from one another. It is the <a href="http://www.abc.net.au/news/2016-03-07/major-banks-the-target-of-asic-investigation-rates-rigging/7225274">primary interest rate benchmark</a> in the Australian financial market, and in Australia in 2014-15, <a href="http://www.afma.com.au/data/bbsw/BBSW%20Guide.pdf">was a market worth some A$1.7 trillion</a>. The Australian Securities and Investment Commission (ASIC) is alleging that by nudging rates, ANZ has been able to make illicit profits. </p>
<p>With LIBOR, evidence emerged that banks were behaving like a cartel, and the practice of rigging rates was very much one of business as usual, with senior management in on the deal. After the LIBOR rigging was uncovered in the US, Barclays CEO Bob Diamond, and Chairman Marcus Aguis both resigned. </p>
<p>The rigging by ANZ allegedly happened while former CEO Mike Smith was in charge. ASIC has already managed to impose penalties against Royal Bank of Scotland (A$1.6 million), UBS, and BNP Paribas (A$1 million) for BBSW manipulation. Although of course, these penalties are small change compared to the billions of dollars in fines imposed abroad.</p>
<h2>The broader impact</h2>
<p>If ASIC’s action against ANZ is successful, this would represent evidence of very serious failures in compliance and risk management at the bank – the same things which led to the global financial crisis, and for which taxpayers are, ultimately, on the hook. This is what really makes the situation totally unacceptable, and morally repugnant: ultimately it is not shareholders who lose out from this kind of misconduct, it is taxpayers. It is for this reason that we are completely reliant on ASIC and the Australian Prudential Regulation Authority (APRA) to put a stop to this kind of misconduct. </p>
<p>And why, if in the UK the LIBOR scandal contributed to the dissolution of the Financial Services Authority, has ASIC remained unaffected? Chairman Greg Medcraft has <a href="http://www.abc.net.au/news/2016-02-11/asic-tells-interest-rate-rigging-banks-to-plead-guilty/7159660">implored banks involved in the scandal to plead guilty</a>, but a firmer hand is needed. </p>
<p>The truth is ASIC should have been all over this issue years ago, even if only as a follower. For example, in the UK the <a href="https://www.gov.uk/government/publications/the-wheatley-review">Wheatley Report of 2012</a> called for the criminalisation of rate rigging. Why did ASIC not take its cue from LIBOR and Wheatley?</p>
<p>Nor have the regulators taken a cue from the Monetary Authority of Singapore. In June 2013 the MAS slugged 20 banks with massive increases in statutory reserves for market manipulation. If ASIC cannot get what it needs in court, it could secure co-operation from APRA to increase regulatory capital from banks that have evidenced conduct risk. Isn’t that the point of Australia’s Council of Financial Regulators?</p>
<p>BBSW if widespread is not just market manipulation. It has the potential to become <a href="http://www.risk.net/journal-of-operational-risk/technical-paper/2330857/libor-manipulation-operational-risks-resulting-from-brokers-misbehavior">systemic risk</a>, and should rightly, therefore, attract higher regulatory capital for the banks involved.</p>
<p>As Pat McConnell rightly points out, <a href="https://theconversation.com/asics-fashion-faux-pas-44590">ASIC should move</a> on the issue of people risk, cultural risk, or conduct risk. APRA Chairman Wayne Byers has resorted to jawboning banks instead of slugging them with higher regulatory capital requirements. Instead he should <a href="https://theconversation.com/comminsure-case-shows-its-time-to-target-reckless-misconduct-in-banking-55748">consider the example of the PPI scandal</a> in the UK. There the regulator actually took up the cudgels, and the result was recompense to some 20 million customers. </p>
<p>ASIC <a href="http://asic.gov.au/about-asic/corporate-publications/newsletters/asic-market-supervision-update/asic-market-supervision-update-previous-issues/market-supervison-update-issue-57/">defines conduct risk</a> as: </p>
<blockquote>
<p>“the risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees.” </p>
</blockquote>
<p>BBSW rigging is an example of conduct risk writ large.</p>
<p>The BBSW, <a href="https://theconversation.com/comminsure-case-shows-its-time-to-target-reckless-misconduct-in-banking-55748">insurance</a> and financial planning scandals being uncovered in Australian banking potentially affect millions of Australians.</p>
<p>Claimants, such as <a href="http://uk.reuters.com/article/uk-barclays-libor-settlement-idUKKCN0T22BP20151113">those who sued Barclays in the US</a>, could encompass anyone whose loan interest rates may have been affected by this fraud: private individuals, corporations, government, non-profits, universities, and other banks. </p>
<p>If ASIC succeeds in its action against ANZ this could open the floodgates of litigation against ANZ and any other bank that has been complicit. Maurice Blackburn Lawyers is threatening a class action against ANZ. Maybe this type of litigation will succeed where our regulators have been unable to.</p><img src="https://counter.theconversation.com/content/55826/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Unethical behaviour by bankers represents a systematic risk to banks, and causes widespread harm.Andrew Schmulow, Senior Lecturer (1 July 2016 onwards), University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/484852015-10-09T12:17:43Z2015-10-09T12:17:43ZToxic innovation: Volkswagen is the tip of a destructive iceberg<figure><img src="https://images.theconversation.com/files/97230/original/image-20151005-28758-1mdc36b.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Consumer baiting?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/randar/16336930506/in/photolist-qTD3gC-2JbRxL-cCQpK-5VPmxB-5VTHoW-hVqqr7-9jFQB9-9jCH84-nUC4oD-5B5Vsn-edPwS3-acwDQd-qYS1ev-acLEzH-gU5FNc-7pSC9o-bEE7VG-ehsAnr-7v3ksR-aczjZY-9ddJyz-9JEh3t-f8qahR-79rLwQ-8tWc48-3LUCsR-4oDnEF-8Fwajc-HjUZY-69YDJA-6PcCgn-9gAZiu-8o4poH-aNF4nx-6FzMvq-a82qv-ESsCA-arvKDZ-h3BPdJ-nwqnF6-wRsyXN-471EuR-b4Ujr-8MBDdG-9ocJu-5n4z1z-dXsMVL-7pGAEL-3Z8RL5-p6zdq1">Tom Simpson</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>The <a href="https://theconversation.com/how-volkswagen-got-caught-cheating-emissions-tests-by-a-clean-air-ngo-47951">recent case of “cheating” at Volkswagen</a> is still reverberating around the globe and threatens to reveal <a href="http://www.theguardian.com/business/2015/sep/21/volkswagen-emissions-scandal-sends-shares-in-global-carmakers-reeling">similar antics in other corporations</a>. </p>
<p>Innovation takes new ideas and creatively applies them in the real world in ways <a href="http://www.innovation-portal.info/books/">which create value</a>. But what if value is created for some in the short term but the impact for others is negative? The VW story points towards innovation that is toxic – either to customers, the offending organisation itself, or in the end, to both. </p>
<p>Toxic innovation develops and changes products, services or <a href="https://rationalmadness.wordpress.com/2013/02/26/toxic-business-consciousness/">backroom business processes</a> that harm customers. It can be deliberate and born of greed; it can be the result of benign but misguided intent; it can be an utterly unforseen and indirect effect. Ultimately, it can damage or destroy the organisation behind it. </p>
<h2>Clumsy companies</h2>
<p>The VW case is just one among other innovation stories where the same skills that produce genuinely successful products are put to the service of narrow financial goals that result in damaging impacts. Not all of these impacts are deliberate or conscious or known in advance. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/97235/original/image-20151005-28786-4z4b8v.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/97235/original/image-20151005-28786-4z4b8v.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/97235/original/image-20151005-28786-4z4b8v.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/97235/original/image-20151005-28786-4z4b8v.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/97235/original/image-20151005-28786-4z4b8v.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/97235/original/image-20151005-28786-4z4b8v.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/97235/original/image-20151005-28786-4z4b8v.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/97235/original/image-20151005-28786-4z4b8v.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Seen better days.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/pnglife/1159161786/in/photolist-2Lr1q3-dBBvJm-nC27U3-GB9ex-pVyFy8-m3Q6M7-bNrzJc-nUo6w9-peiMji-nTBM7x-nTBLwp-6S6YKT-6S6Ye8-w1DxgM-wEUDeW-wVd37E-wEURRu-wEURN5-wWMt59-wWMm95-wWMpD1-w1vgHj-wEUNcW-6kVr2-wXwB6g-aEZMt-pRVj4v-asL9Xo-aeocFJ-6K4ZT-y9jR9-y9jNW-aekr2z-aEZQD-99MpRx-qTLJ5v-bccvr-hP4kuv-aEXV7-bccmN-aEY6c-6FZZSM-2fAVQy-aeku1V-Kmsj9-aEXYw-KmwCM-99Mks6-99Qtgf-aEYaA">Nomad Tales</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
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<p>This phenomenon is often based on an endemic <a href="https://rationalmadness.wordpress.com/2013/02/26/toxic-business-consciousness/">troubled business culture</a>. When banks were recently outed for rigging the LIBOR interbank lending rate, this kind of rotten culture was uncovered as well. The LIBOR rigging process itself was <a href="http://www.bloomberg.com/graphics/2015-how-to-rig-libor-interactive/">remarkably innovative and involved plenty of creative activity</a>. It was also illegal and its impact on banks and the world economy is still felt today.</p>
<p>VW’s <a href="http://www.bbc.co.uk/news/business-34324772">environmental “cheat”</a> – deploying software that could trick emissions tests – allowed the car to pollute and no one to be any the wiser. It appears <a href="http://uk.reuters.com/article/2015/09/28/uk-volkswagen-emissions-idUKKCN0RR0KV20150928">VW was warned not to do this</a>, but the extent to which this deception <a href="http://www.npr.org/sections/thetwo-way/2015/10/01/445025925/volkswagen-latest-u-s-sales-stall-german-prosecutors-veer-from-criminal-probe">was known in the higher echelons of the company</a> is yet to be discovered. </p>
<p>So a potentially innovative bit of in-car software became toxic – for the environment in terms of emissions and ultimately in terms of poisoning the Volkswagen brand. What the case has also thrown up is that it is the <a href="http://www.bbc.co.uk/news/business-34340301">emissions tests themselves</a> that would benefit from some real (and non-toxic) innovation.</p>
<h2>Designed to fail</h2>
<p>Another example can be found in the concept of “<a href="http://blogs.blouinnews.com/blouinbeattechnology/2015/09/02/planned-obsolescence-and-the-environment/">planned obsolescence</a>”. Part of all good innovation involves testing products and knowing in advance how and when they will begin to, and ultimately totally fail. That’s vital for safety, for maintenance and product replacement. So, when companies began to be accused of knowingly engineering products to fail or <a href="http://www.wsj.com/articles/we-need-the-right-to-repair-our-gadgets-1441737868">deliberately making them harder to repair</a>, then it doesn’t feel like their ingenuity is devoted to us lowly consumers. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/97232/original/image-20151005-28744-vq5qat.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/97232/original/image-20151005-28744-vq5qat.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/97232/original/image-20151005-28744-vq5qat.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/97232/original/image-20151005-28744-vq5qat.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/97232/original/image-20151005-28744-vq5qat.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/97232/original/image-20151005-28744-vq5qat.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/97232/original/image-20151005-28744-vq5qat.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/97232/original/image-20151005-28744-vq5qat.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/dahlstroms/3635587255/in/photolist-6xgkqT-954fBB-957WXQ-957y8y-957dW7-957s8w-954jov-957SdU-954gPV-954TvH-953duZ-957ghf-fwqbHd-957jhL-957oim-954iX2-qLE1UK-957nqo-fwaWM4-fwqbU7-954y7B-954jR6-954wq6-954THc-954m5X-953fXk-957qEG-956kqS-956gLm-95372k-957pUE-957fpo-956jAo-956fK5-954Xe8-957wyN-957nzb-957JBA-954rwe-954aMt-953uJX-fwqbXj-956dLs-957ng9-9548ek-953cGr-fw7A4K-957Spf-qujy3E-957PsS">Håkan Dahlström</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>We saw the impact of this idea recently <a href="http://www.zdnet.com/article/does-apple-throttle-older-iphones-to-nudge-you-into-buying-a-new-one/">when a Harvard study raised questions</a> over whether an operating system update by Apple was slowing down iPhones at a time when product upgrades became available. Now, new software often loads new features which in turn demand more resources and can cause systems to slow, in fact it is a major part of the technology sector’s appeal that companies are constantly seeking to attract customers towards enhanced products. Customers who felt the iOS9 update was <a href="http://www.theguardian.com/technology/2015/sep/24/iphone-slow-ios-9-update-iphone-4s-iphone-5-iphone-5s">slowing down their older phone</a> may have been wrong, but the suspicion alone can be enough to damage trust in a brand. </p>
<p>There is certainly <a href="http://www.techrepublic.com/blog/cracking-open/five-ways-manufacturers-make-devices-hard-to-repair/">growing evidence</a> that consumer electronics firms are focusing their innovation efforts on making it harder to repair products. If it ever does emerge that clever design by smartphone manufacturers is used to hobble older phones and bully us by stealth us into upgrading, the scandal could at least partly match that which has befallen VW.</p>
<h2>Innovation or intrusion?</h2>
<p>Facebook saw <a href="http://www.bbc.co.uk/news/world-us-canada-34383655">4% wiped off its share price</a> when its platform went down for several hours (and not for the first time). One reason cited for this was engineers engaging in incremental, small-scale innovation which crashed the whole network. This was unintended but the result was a lot of damage to Facebook’s reputation as an always-on social media platform. </p>
<p>Perhaps more significantly, its attempts to change a core part of its platform, the “timeline”, and introduce a supposed innovation known as the Year in Review, resulted in significant negative impact on its brand. Users <a href="http://meyerweb.com/eric/thoughts/2014/12/24/inadvertent-algorithmic-cruelty/">started seeing photos</a> they would rather have forgotten suddenly appearing under their noses. A phrase – “inadvertent algorithimic cruelty” – was even coined to describe this, and the firm was forced to <a href="http://www.theguardian.com/technology/2014/dec/29/facebook-apologises-over-cruel-year-in-review-clips">issue an apology</a>. </p>
<h2>Not so Sunny Delight</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/97236/original/image-20151005-28732-tnyvma.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/97236/original/image-20151005-28732-tnyvma.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/97236/original/image-20151005-28732-tnyvma.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/97236/original/image-20151005-28732-tnyvma.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/97236/original/image-20151005-28732-tnyvma.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/97236/original/image-20151005-28732-tnyvma.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/97236/original/image-20151005-28732-tnyvma.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/97236/original/image-20151005-28732-tnyvma.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Showing some bottle.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/the_toursit/6873933559/in/photolist-btqGXR-CUVUm-Dd2Nr-5JuQxa-dKnu4S-rdccAf-mN9rPN-CUVTd-8bRiqi-57ejyX-4rSwxW-6UZuVy-5nvvoL-fzvxsH-fzKRB3-5nre8F-4uErMw-5nrexp-5nvvvQ-Czkfd-pMXZvK-pc6t1W-rRhsN8-pTc6hp-xt5qpE-6geTcA-dS68Yj-4HiB6W-cNUx5W-e2dYas-4vhoWv-94xiiR-6ki4NZ-33UurF-9QEpPd-ceSzom-xcdHU-4xZdru-ri2uU1-cUY7W-uvQ6P-4s6cfN-qKhaMc-oFNSfz-7WNwv7-BzFfB-87hAP-fod4D-qsYb2a-69ovgJ">Gerald Angeles</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>Facebook’s clunky attempt to spice up its offering might have been a failure of technology, but perhaps the most damaging innovations happen in marketing. </p>
<p>Kids’ drink Sunny Delight was marketed to parents as a healthy fresh orange juice product. It turned into a <a href="http://arnoldonethicalmarketing.brandrepublic.com/2015/10/02/the-power-of-trust/">brand disaster</a> when parents discovered it <a href="http://metro.co.uk/2015/09/25/12-unhealthy-90s-foods-from-our-childhood-ranked-from-best-to-worst-5397871/">was actually artificially coloured sugar water</a> – and sales crashed.</p>
<p>The back room designers of this product had engaged in all kinds of product innovation activity to fool consumers into believing this drink was healthy and full of orange juice goodness. From pictures of oranges on the bright and optimistic packaging, to colour and taste – what we really had was a cheat product.</p>
<p>In short, VW is only the most current and most prominent example of toxic innovation. If corporations want to keep the trust of their consumers they will have to design toxic innovation out of their broader innovation activity. Sadly, stories are emerging in increasing frequency in which companies are applying the same skills they use to brings us wonderful products and services, to cheating, deceiving or in simply trying to be clumsily smart. The result is damage for everyone along the supply chain. </p>
<p>As the Volkswagen case shows, these attempts – or at least the ones we find out about – are a massively false economy. Innovation is always more successful in the long run when it is conscious, connected to real customer benefit, and generates trust and confidence.</p><img src="https://counter.theconversation.com/content/48485/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Levy owns shares in CATS3000 Ltd. </span></em></p>Why do companies devote so much energy to ingenuity that causes harm?Paul Levy, Senior Researcher in Innovation Management, University of BrightonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/457562015-08-06T20:07:59Z2015-08-06T20:07:59ZLie-bore: powerful bank regulators running out of excuses<p>The 14-year sentence handed to Tom Hayes, the Yen trader at the centre of the <a href="https://theconversation.com/qanda-what-is-the-libor-scandal-and-why-does-it-matter-45662">Libor-fixing scandal</a> in the UK, is the longest sentence yet in a scandal that has cost his former employer UBS, and others, <a href="http://www.businessinsider.com.au/libor-rigging-criminal-charges-and-fines-2015-5">US$17 billion in fines</a>.</p>
<p>Apart from his obvious guilt, Hayes went out of his way to <a href="http://www.ft.com/intl/cms/s/0/60a5de6e-322a-11e5-8873-775ba7c2ea3d.html#axzz3hvYZMPxx">antagonise the Court</a>, and the Judge.</p>
<p>Hayes, described as the “Machiavelli of Libor”, will not be the last to suffer the consequences of this fraud. Unfortunately, however, it appears bank executives will not be among those punished. And this is curious. UBS either knew, turned a blind eye, or had such weak internal controls that Hayes was able to perpetrate this fraud for three some years. </p>
<p>UBS was no doubt motivated, in part, by the US$260 million Hayes made for it. All the while he was being courted by the usual suspects: Lehman Brothers and Goldman Sachs.</p>
<p>He then fell out with UBS, over pay, and joined Citibank. Within a year Citibank had discovered his fraud. What at UBS we were led to believe remained undiscovered for in excess of three years, Citi sacked him for.</p>
<p>Along with Libor fixing went the obligatory “Bollinger by the case” lifestyle, amply supported by a perverse incentive structure. Hayes claimed in <a href="http://www.ft.com/intl/cms/s/0/0b10ac00-0a01-11e5-82e4-00144feabdc0.html#axzz3hvYZMPxx">testimony</a> that his managers were well aware of what he was doing. Indeed one trader remarked “mom Teresa would have rigged Libor had she been trading it!”.</p>
<p>Tactically, Hayes was no genius. He gave 80 hours of sworn testimony to the <a href="http://www.sfo.gov.uk">Serious Fraud Office (SFO)</a> as part of a plea deal. He then decided to renege on that deal, and plead not guilty. But he failed to make the admissibility of the testimony contingent upon the plea deal. So he was left pleading not guilty, facing 80 hours of his own testimony.</p>
<h2>ASIC’s role</h2>
<p>In Australia the Australian Securities and Investments Commission <a href="https://www.australianbankingfinance.com/banking/have-uk-banks-learnt-nothing-from-libor-mess-/">(ASIC) is investigating</a> rigging of the bank bill swap rate, as well as misconduct in the forex rate. True to form, ASIC is again taking a “light-touch” approach, appealing to bankers’ better nature, despite the gathering storm in the community and the rage sweeping the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASIC">Senate select committee.</a></p>
<p>ASIC obviously cannot read the writing on the wall, or seems unable to understand its remit: to enforce the law, with prosecutions if necessary, not gentle cajoling. The result is systemic fraud taking root within the financial system. Individual investors lose. As does every trader and banker who is honest and doing the right thing.</p>
<p>ASIC Chairman Greg Medcraft has expressed his frustration that banks are adopting an overly legalistic approach. But he neglects to mention the very <a href="http://asic.gov.au/about-asic/asic-investigations-and-enforcement/asic-s-compulsory-information-gathering-powers/">substantial power</a> that ASIC possesses. This includes the <a href="http://www.janepetrolo.com/wp-content/uploads/2011/07/ASICs-Power-to-Investigate-CPD.pdf">power to search, to seize, to eavesdrop, to enter, to inspect, to compel disclosure</a>. Nor does he mention that ASIC has substantial resources, and could quite easily target one bank, or one trader, to make the point that rigging interest rates will not go unpunished.</p>
<p>This comes on top of a litany of failures from ASIC to enforce the law: the financial advice scandals at CBA, NAB and Macquarie, front-running and insider trading at IOOF, and now interest rates. As my colleague Pat McConnell <a href="https://theconversation.com/ioof-protecting-the-whistle-blower-45595">wrote recently</a> in The Conversation, most of the compliance being compelled in the financial industry is not thanks to ASIC, but the result of investigative journalism from “one-woman regulator” Adele Ferguson.</p>
<p>Josh Frydenberg, assistant Treasurer, has announced a <a href="http://jaf.ministers.treasury.gov.au/media-release/036-2015/">review of ASIC</a>. But the review will not accept submissions, so is hardly consultative.</p>
<p>Having worked for ASIC’s sister organisation and bank regulator APRA, I can attest to cultural impediments within government that do not take kindly to criticism, and are deeply resistant to anything that challenges the prevailing orthodoxy. Disappointingly, these were exactly some of the <a href="http://www.smh.com.au/articles/2003/04/16/1050172656671.html">criticisms levelled against APRA</a> after the collapse of HIH. On that occasion the Royal Commission called for changes to APRA that would reform the culture of the bank regulator. For a time APRA seemed genuinely engaged in this project. But it has long since fallen back into old habits: civil service mandarins more concerned with building personal empires than building resilience in the financial system.</p>
<p>It’s time for the creation of a Financial Regulator Assessment Board, in line with a <a href="http://fsi.gov.au/publications/final-report/">recommendation (27) from the Financial System Inquiry</a>. Nothing short of an ongoing, independent review of the corporate cop will stop Australia’s slide into systemic corruption. A board, comprised of wise women and men, not connected to government (Treasury, the RBA, APRA or ASIC), and who have no skin in the game, are more likely to provide the kind of over the horizon views of financial system challenges, than are hand-picked bureaucrats, picked by the assistant Treasurer.</p>
<p>Some might view the establishment of such a board as duplication. Which in some ways is exactly what it is.</p>
<p>But in aircraft engineering duplication is called “double-redundancy”. In other words, when one system fails, a second, back-up system picks up where the first, failed system left off. This is exactly what a Financial Regulator Assessment Board could do for the financial system.</p>
<p>Must we wait for a financial crisis before this idea is implemented?</p><img src="https://counter.theconversation.com/content/45756/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australian regulator ASIC has significant power to help it stamp out systemic fraud in the banking sector. Now they just need to use it.Andrew Schmulow, Principal, Clarity Prudential Regulatory Consulting Pty Ltd. Visiting Researcher, Oliver Schreiner School of Law, University of the Witwatersrand, Johannesburg., University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/456622015-08-04T13:33:55Z2015-08-04T13:33:55ZQ&A: what is the Libor scandal and why does it matter?<p><em>Former Citigroup and UBS trader Tom Hayes has become the first person <a href="https://theconversation.com/libor-one-man-found-guilty-but-culture-change-is-still-needed-in-financial-sector-45634">to be convicted</a> for rigging global Libor interest rates. He has been found guilty of eight counts of conspiring to defraud and sentenced to 14 years in prison.</em> </p>
<p><em>But what is Libor and what does this mean for the future of the banking industry? Pamela Yeow explains.</em></p>
<p><strong>What is Libor?</strong></p>
<p>Libor stands for the London Interbank Offered Rate. It is a global benchmark interest rate used to set a range of financial deals including how banks lend money to each other. Libor rates are calculated for five currencies and seven borrowing periods ranging from overnight to one year and are published each business day <a href="http://markets.ft.com/research/Markets/Bonds">by Thomson Reuters</a>. </p>
<p>It is important because it offers a reference rate for many financial instruments in both financial markets and commercial fields. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. For example, at least US$350 trillion in derivatives and other financial products <a href="http://www.newyorkfed.org/research/staff_reports/sr667.pdf">are tied to it</a>. It reflects the confidence banks have in each other’s financial health.</p>
<p><strong>How is Libor calculated?</strong></p>
<p>Each day a panel of leading banks submits the interest rates at which they are willing to lend. The highest and lowest responses are discarded and an average is taken of the middle half. Every day the average is reported at 11.30am. </p>
<p><strong>How was it rigged?</strong></p>
<p>It has been alleged that traders at several banks conspired to influence the final average rate – to the benefit of their trading. They would work together and submit false interest rate figures to get the desired daily rate. Tom Hayes has been found guilty of being central to this manipulation and the prosecution said he acted as one of the ringleaders. </p>
<p>As many as <a href="http://www.economist.com/node/21558281">20 major banks</a> on all continents have been investigated including Barclays, Citibank, JP Morgan and UBS. Several have been hit <a href="http://www.telegraph.co.uk/finance/financial-crime/11781091/What-is-Libor-and-how-is-it-manipulated.html">with hefty fines</a>.</p>
<p><strong>What has been done about the scandal?</strong></p>
<p>There has been a huge effort to crack down on the Libor scandal – and other rate-rigging that emerged in the aftermath of the financial crisis. As well as heavy fines meted out to the banks involved, the government commissioned a <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/191763/condoc_wheatley_review.pdf">major review of Libor</a> and how it was set. </p>
<p>Oversight of Libor moved from the British Bankers’ Association <a href="http://www.ft.com/cms/s/0/dd60b84c-7f6c-11e3-94d2-00144feabdc0.html#axzz3hjftNyz7">to the Intercontinental Exchange</a>, rates are now tied more strictly to actual transactions, for which records are kept, and there are now specific <a href="http://www.bankofengland.co.uk/markets/Documents/femraug2014.pdf">criminal sanctions</a> for manipulating the benchmark interest rates.</p>
<p><strong>So should we trust the banks now?</strong></p>
<p>By prosecuting Tom Hayes, the person who was seen to be the “ringleader” of the crime has been convicted. But have we regained trust in the banking system as a whole? I put forward the case that we haven’t and that it will take a lot more than just prosecuting individuals for the general public to regain their trust in the system as a whole. </p>
<p>When it comes to trust there are at least <a href="http://www.emeraldinsight.com/doi/abs/10.1108/01409171111152493">two levels to take into account</a>. We might have fixed things at the individual level by removing wrongdoers from the system and setting up criminal sanctions to do so. But the system as a whole and its reputation still need repairing. </p>
<p>As Hayes said, he was part of a <a href="http://www.telegraph.co.uk/finance/financial-crime/11780670/Tom-Hayes-Libor-trial-the-top-quotes.html">wider system of wrongdoing</a>. The legal system has found him guilty and they may well go on to find his co-conspirators guilty. But until the organisational culture of greed, short-termism and short-sightedness is corrected, the banking sector will be far from reformed. </p>
<p><strong>How can the banks regain our trust?</strong></p>
<p>The bank is supposed to be a trustworthy institution where we deposit money into savings accounts and trust that it will be invested reliably. We want to be able to trust that the banking system is robust and transparent, and without fault. </p>
<p>Yet it’s clear that this is not the case. The Edelman Trust Barometer has found that trust in financial services has hovered around the 50% mark – only increasing from 46% in 2012 (which was when news of the Libor scandal broke) <a href="http://www.edelman.com/2015-edelman-trust-barometer/trust-across-industries/financial-services-path-to-building-trust/">to 52% in 2015</a>. In order to rebuild trust, Edelman found that the societal attributes of financial institutions played a more significant role than operations. For example, respondents ranked “ethical business practices” (76%), “listens to customer needs and feedback” (74%) and “places customers ahead of profits” (73%) as the three important actions financial institutions need to take in order to restore trust. </p>
<p>Restoring trust will be a <a href="https://www.researchgate.net/publication/43695842_Trust_repair_after_organization-level_failure">long process</a>. Prosecuting individuals responsible for Libor fixinng is a step in the right direction. But in the longer term, banks and financial institutions need to take ownership of the perceived faults – banking systems, regulatory systems and organisational culture. Only when they can demonstrate that they are acting in the interest of their customers, will people start to trust them again.</p><img src="https://counter.theconversation.com/content/45662/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pamela Yeow ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d&#39;une organisation qui pourrait tirer profit de cet article, et n&#39;a déclaré aucune autre affiliation que son poste universitaire.</span></em></p>Former trader Tom Hayes has been sentenced to 14 years in prison for manipulating Libor. But what is it and why does it matter?Pamela Yeow, Senior Lecturer in Management, University of KentLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/456342015-08-03T17:46:10Z2015-08-03T17:46:10ZLibor: one man found guilty but culture change is still needed in financial sector<p>Former UBS and Citigroup trader Tom Hayes has been <a href="http://www.ft.com/cms/s/0/60a5de6e-322a-11e5-8873-775ba7c2ea3d.html#axzz3hjftNyz7">convicted of eight counts</a> of conspiring with other traders and brokers to manipulate Libor. As news of the sentencing emerged, much of the coverage has focused on the quirks of the man in question – the story of an autisic mathematician who was able to manipulate one of the world’s most important financial benchmarks for the price of a <a href="http://www.bbc.co.uk/news/business-33635340">Mars bar</a>. </p>
<p>There have been descriptions of a man who <a href="http://www.bloomberg.com/news/articles/2015-08-03/thomas-hayes-guilty-the-libor-trial-in-12-quotes">slept under the same superhero duvet</a> between the age of eight and 24. And we found out that when a student he worked in a restaurant <a href="http://www.bbc.co.uk/news/business-33635340">deboning chicken</a> and cleaning a deep-fat frier. But all this tells us little about the collective psychology of the City of London. And until there is a collective culture change in the financial industry, we can expect to see the past repeating itself.</p>
<p>Questions over the integrity of the Libor rate were <a href="http://www.wsj.com/articles/SB121200703762027135">first raised in 2008</a>. And that former member of the Bank of England’s Monetary Policy Committee described it as <a href="http://www.telegraph.co.uk/finance/economics/2795962/Former-MPC-man-calls-for-Libor-to-be-replaced.html">“the rate at which banks don’t lend to each other”</a>. But it was not until 2012 that US authorities revealed widespread collusion to manipulate the rate. </p>
<p>Barclays was the first among many banks to be fined hundreds of millions of dollars for its role in manipulating this key financial indice. These huge fines effectively <a href="https://theconversation.com/barclays-rate-rigging-scandal-exposes-the-rot-in-uk-banking-system-8032">lifted the lid on widespread unethical behaviour</a> in various sectors of the global financial market, including the gold and <a href="https://theconversation.com/common-currency-a-forex-scandal-that-epitomises-the-blindness-in-the-banking-crisis-34150">foreign exchange markets</a>. What these investigations showed is that these apparently free markets were actually controlled by a small number of traders working in global banks who were able to manipulate global indicies for their own benefits. </p>
<h2>Holding individuals to account</h2>
<p>Dozens of financial institutions have been routinely put on trial and been forced to pay out vast sums for their role in the Libor scandal. But until now, no individuals had been held to account. For many, this was an indication that the City seemed to be quite happy with landing huge penalties on shareholders, but they wanted to avoid individuals being punished at all costs. Banks, like any other corporate structure, appeared to be a mechanism for avoiding individual culpability while harvesting the benefits of it. </p>
<p>The conviction of Tom Hayes is the start of what is likely to be a long process of individuals being held to account for their role in wrongdoing. The UK’s Serious Fraud Office already has other cases in the works and this victory will likely embolden them <a href="http://www.ft.com/cms/s/0/60a5de6e-322a-11e5-8873-775ba7c2ea3d.html#axzz3hjftNyz7">to file charges against more of his conspirators</a>.</p>
<h2>Collective responsibility</h2>
<p>Certainly showing a willingness to punish individuals for misdeeds is likely to be an important deterrent. But questions will remain about whether just coming down hard on a few individuals in a handful of high-profile cases will actually change much about the collective dynamics within the city <a href="http://www.theguardian.com/commentisfree/2012/jun/30/will-hutton-barclays-banking-reform">which produced these problems in the first place</a>. </p>
<p>Hayes’ trial has given us a fascinating insight into the culture which made financial markets into such a hot-house of unethical behaviour. It shows traders were primarily hired for their technical skills and their results orientation. This often meant they were bereft of the ability to make ethical judgements. It also shows that traders were certainly aware they were doing wrong. Hayes himself <a href="http://www.telegraph.co.uk/finance/financial-crime/11780670/Tom-Hayes-Libor-trial-the-top-quotes.html">pointed out</a> that he did not think he was “going to get a medal from the regulator” for his actions, but he also did not think he was a Bernie Madoff. </p>
<p>The trial also raised problems of collective responsibility. Hayes seemed to think that because everyone else was doing it, it was OK. The trial showed that traders were evaluated on crude metrics <a href="http://cgt.columbia.edu/wp-content/uploads/2014/01/The-Good-Banker.pdf">based on short-term profits</a>. This prompted traders to focus solely on short-term performance with disregard for the longer-term risks. </p>
<p>Another fact the trial highlighted was the role of the flawed design of the market in encouraging manipulation. The same people who set the Libor rate were also the ones who traded on it. This created both the opportunity as well as incentives for traders to set the rate in a way that would advantage their trading activity. Hayes pointed out that even Mother Theresa would manipulate Libor if she was setting it and trading it. </p>
<p>Finally, the trial showed that a widespread denial within the industry of collective misbehaviour meant that those in power were not willing to admit there was a problem, much less were they willing to put it right. For instance, during an investigation one manager at Deutsche Bank dismissed the idea that traders manipulated the Libor rate <a href="http://www.bloomberg.com/news/articles/2015-06-09/bba-plan-to-end-libor-low-balling-in-2008-raising-submissions">as a “conspiracy theory”</a>. It seems this was one of those conspiracy theories which proved to be true. </p>
<h2>Significant shifts</h2>
<p>In the wake of revelations about Libor, there have been some <a href="http://www.bbc.co.uk/news/business-22871584">significant changes</a> aimed to eliminating the culture which produced such widespread misbehaviour. Traders no longer set the Libor rates. Remuneration is no longer just based on short-term performance, but also considers cultural factors and risk as well. Banks have tried to boost the moral intelligence of their staff by sending them on training courses. Risk management systems have been tightened in order to pick up bad behaviour. The authorities have also started to hold individuals to account for misdeeds. </p>
<p>What remains to be seen is whether these measures are enough to change the collective dynamics in the banking sector which produced widespread manipulation of not just Libor, but most other global financial indices. If they do not, we can expect that just as one trader is sentenced in a court in one part of London, another trader a few hundred meters away is working out a way to get up to no good and make a fortune in the process.</p><img src="https://counter.theconversation.com/content/45634/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Convicting individuals of wrongdoing is important but only a culture change in the financial sector will stop future crimes.Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/432132015-06-12T14:46:57Z2015-06-12T14:46:57ZDeutsche does the decent thing as joint CEOs take it on the chin<p>The <a href="http://www.wsj.com/articles/deutsche-bank-co-ceos-to-announce-resignations-1433674815">resignations</a> of the co-CEOs of Deutsche Bank are a useful example for managers everywhere from an industry which has suffered its share of public outrage.</p>
<p>Anshu Jain is stepping down at the end of this month and Juergen Fitschen will leave next May. Their resignations follow criticism by shareholders, trade unions and employees, as well as tumbling share prices following a dip in performance (it must have been galling for them to watch the <a href="http://www.bbc.co.uk/news/business-33044802">shares rise 4%</a> after the announcement). A strategy <a href="http://www.wsj.com/articles/deutsche-banks-jain-must-now-deliver-1432224870">unveiled in May</a> in a bid to turn around the bank’s fortunes <a href="http://uk.reuters.com/article/2015/06/08/uk-deutsche-bank-ceo-idUKKBN0ON0GH20150608">faced a rough reception</a> from markets.</p>
<p>You could view the resignations from Deutsche Bank’s senior team as a public and institutional apology by the two CEOs and the bank. This is a welcome move and one which marks the start of a journey on the part of the bank to seek to restore the trust of its customers, the regulators, its employees and the general public. </p>
<p>In common with many of its peers, Deutsche has suffered its fair share of knocks. The bank has shelled out $2.5bn to US and UK authorities to <a href="http://www.ft.com/cms/s/0/ccf7af08-e904-11e4-a71a-00144feab7de.html#axzz3ca1C6zMA">settle allegations</a> that it manipulated the Libor benchmark rate. There have been <a href="http://uk.reuters.com/article/2015/06/05/uk-deutsche-bank-moscow-idUKKBN0OL1LY20150605">accusations of money laundering</a> within the Russian unit, which <a href="http://www.ft.com/cms/s/0/ebe06e1e-0b87-11e5-994d-00144feabdc0.html">the bank is reported to be investigating</a>, and <a href="http://www.bloomberg.com/news/articles/2015-06-09/fitschen-s-deutsche-bank-exit-leaves-loyalties-strained-in-trial">Fitschen is on trial</a> over evidence he gave regarding the collapse of the Kirch media empire in 2002. He denies any wrongdoing.</p>
<h2>Trust up</h2>
<p>People judge the trustworthiness of both institutions and individuals on the basis of whether they can do their job, whether they care about others in the company or community or are entirely self-serving, and whether they display a basic integrity in all their dealings.</p>
<p>Therefore the decision of these joint CEOs is an important action for a number of reasons. <a href="https://theconversation.com/trust-will-out-how-the-financial-crisis-boosted-the-best-leaders-32242">Our research shows</a> no one takes institutional protestations of trustworthiness seriously unless leaders are held to account.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84341/original/image-20150609-10713-1xdoiop.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/84341/original/image-20150609-10713-1xdoiop.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/84341/original/image-20150609-10713-1xdoiop.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/84341/original/image-20150609-10713-1xdoiop.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/84341/original/image-20150609-10713-1xdoiop.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/84341/original/image-20150609-10713-1xdoiop.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/84341/original/image-20150609-10713-1xdoiop.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/84341/original/image-20150609-10713-1xdoiop.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bosses are under scrutiny from their employees.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/koonce/4840305481/in/photolist-8nHQbM-73q9YU-bjihbk-axwB9M-g4br9-7u9UH4-9aBj4K-5taZJ7-djNmPx-fEeo7z-m74PyP-pjW5H5-9drZc-6aMx5Q-bMWPgF-f4EqEA-kZeBZ8-kr2jSP-oP5sMk-d1fB8o-qp2o6v-oXKH8c-aqQqYs-6jVapH-fsQdGV-57f4t-oFgE5p-2mVc8-2MP92g-acuRsY-acs5kt-sQFJf-c1G6U5-dWgpvs-c1G74A-c1G71m-c1G6R5-dWgpsj-dWgppw-dWgpm5-c1ND87-aoG4qA-GQVQ-bGzYtD-kdNbpp-m9oDzw-bj7Tde-frap68-spZniM-qxMn67">Josh Koonce</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>The research has found that one of the things that really annoyed other employees was the failure of apparently powerful people (such as non-executive directors) to either take action against wrongdoers within their organisation or to take responsibility when things go wrong. Why bother to be trustworthy at middle or lower levels of an organisation when immoral or incompetent behaviour receives no institutional sanction higher up? </p>
<p>We also found that accepting responsibility for the consequences of one’s actions matters. There is a certain integrity in putting one’s hands up and admitting that, as a well-paid individual, you got it wrong. Even if you are competent, however clever and able you might be, also doing the right thing for the right reasons, having integrity, still counts. Apologies help to restore trust. Failing to take responsibility for one’s failures does not. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84339/original/image-20150609-10717-o7aoaa.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/84339/original/image-20150609-10717-o7aoaa.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/84339/original/image-20150609-10717-o7aoaa.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/84339/original/image-20150609-10717-o7aoaa.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/84339/original/image-20150609-10717-o7aoaa.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/84339/original/image-20150609-10717-o7aoaa.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/84339/original/image-20150609-10717-o7aoaa.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/84339/original/image-20150609-10717-o7aoaa.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reputational risk.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/condor-airline/8800767681/in/photolist-epGeBP-rrUjFr-nmk29G-6HRcQL-7py1j3-qRnkzp-qPezr5-b17xBn-qyXj4j-qRwwft-qPezvy-qPezch-9mcCuG-6w34UK-ashEu-fabKih-rxXCiy-6LDPAb-6LEYUf-6Lzrwr-6LDo5u-6LD69f-6LyRyP-6LyPVz-6LDugJ-6Lzj86-6LzxJv-6Lz98V-6LDwmf-6LDqCq-6LDgN1-6LyUfk-6C8zcC-6LERUq-4FyLFk-np8MFq-ns5Wsa-jJ8fE7-bAXn8B-68p9CW-eH35T3-5phLQZ-qm1rF2-54bhAW-4MgByu-qNHeZj-5VEfDj-5GD58D-9KjwmS-9Jya5i">Condor.com</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Contrast the Deutsche Bank executives’ actions with the <a href="http://www.theguardian.com/uk-news/2015/may/13/thomas-cook-shame-over-deaths-children-in-corfu">travel company Thomas Cook</a> where management has faced serious criticisms over the handling of the tragic deaths of two young children on one of their holidays in 2006. </p>
<h2>Shouldering the cost</h2>
<p>Perhaps in the Deutsche Bank story we are starting to see the green shoots of individual social responsibility. Corporate social responsibility costs senior executives nothing at a personal level. In contrast, taking individual social responsibility by exiting the company starts to communicate to the world that individual executives, however powerful, can be held to account by others in society. </p>
<p>It really is about time leaders in these banks took public responsibility for their own actions and decisions. Their successors need to take to heart the fact that people will only trust them if they continually demonstrate their ability to do the job, their benevolence towards others and their integrity in decision making on a day-to-day basis. </p>
<p>We need these three characteristics of leadership to once again be truly accepted as essential for any who aspire to be senior directors within financial services. Only then will we see behavioural change in the banks. Hopefully through that change a new generation of leaders will emerge who at a personal level get back to the idea of banking as a responsible business activity which contributes to the economic development of nation states, not just a means of amassing personal wealth. And only then will we see public confidence in the banks fully restored.</p><img src="https://counter.theconversation.com/content/43213/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Veronica Hope Hailey is the author of three public reports on trust: Where has all the trust gone? (2012); Cultivating Trustworthy Leadership (2014); Experiencing Trustworthy Leadership (2014). The research was funded by the CIPD and HEIF.</span></em></p>Taking ultimate responsibility for your company's actions hasn't been a popular choice for bosses, but Jain and Fitscher have now set a strong example.Veronica Hope Hailey, Dean, School of Management, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/430342015-06-10T05:19:28Z2015-06-10T05:19:28ZHSBC restructuring shows universal banks are coming back down to earth<p>HSBC’s decision to end its operations in Brazil and Turkey, <a href="http://uk.reuters.com/article/2015/06/09/uk-hsbc-strategy-idUKKBN0OO2KQ20150609">and lay off around 10% of its workforce</a> worldwide shows just how far it has come from the days of touting itself as “the world’s local bank”. Its strategy used to be to offer any financial service everywhere in the world. Whether you were in Shanghai, Sydney, Springfield or Southampton, you could access services such as personal banking, foreign exchange business banking and investment banking.</p>
<p>This model paid off for years. The bank provided impressive returns to investors, progressively extended its footprint, and even seemed to dodge the worst effects of the financial crisis.</p>
<p>HSBC was not alone in doing well by doing everything, anywhere. Its competitors have built similar business models during the last 20 years. </p>
<h2>Merger mania wasn’t for customers</h2>
<p>In the past, different financial services were provided by different organisations. You went to one company for insurance, one for investment banking, and one for personal banking. There were co-operatives, partnerships, publicly listed companies and privately held companies. Banks in each country looked completely different. This meant there was a verdant landscape of different kinds of financial service organisation.</p>
<p>But during the 1980s, all this changed. Retails banks started to provide a whole range of services they had not before, such as insurance. Then retail and investment banks began to merge. <a href="http://www.thenews.coop/85589/news/general/big-bang-demutualisation-building-societies-failed/">Building societies demutualised</a>. Banks began to expand across the world. The result was that the world’s financial sector was dominated by a handful of gigantic players. There was also a business model mono-culture: a universal bank which provided almost every service to everyone in the world.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=420&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=420&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=420&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=528&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=528&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=528&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Broken model.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/elycefeliz/3833624039/in/photolist-83zxqq-621Ks1-7ykXNB-iGZz2-iEaDb-iE9Zn-6QLjSc-iH1Xh-8rsCQC-n3dFsN-4Xz2Fh-iE8nm-n3cg1T-qCq93b-iE8S4-iE925-iE8vu-iH1EJ-iE86F-iE9s5-iH1oW-62ovuK-rD8QCw-qJCWSH-61vuVR-iH1Ny-iH3fe-iH2A9-iH2QC-iH18m-iH2eZ-iH37o-iH11q-iH2un-iH2nJ-iH26p-iH1fW-iH2Yy-iEavY-iGZsw-iH1wE-iGZSK-iE9zQ-iE8DY-iE9Ht-iE9Qs-iEa7M-iE8eB-iE9k3-iE9cx">elycefeliz</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Banks claimed to do this because their customers wanted it. There certainly were a number of sophisticated global clients looking for global banking services. But the real reason for adopting this model had nothing to do with customers. By merging retail and investment banks and continually growing the size of the bank’s balance sheet, these global giants were able to effectively use the money deposited in their retail banks to engage in risky – but highly profitable – trading and investment activities.</p>
<p>This model paid off for many years. As big banks grew, they delivered double digit returns to their shareholders. But perhaps more importantly, they created a lucrative stream of bonuses for senior managers. They also pumped out tax income for governments which hosted them. It seemed everyone was winning.</p>
<h2>Downsizing</h2>
<p>That was until 2007, when the financial crisis struck. When this happened these global giants with massive balance sheets became a liability. It quickly became obvious that they were too big to fail. If a bank went down, they could threaten the global economy. </p>
<p>And we quickly learned too that they were too big to manage. In the long aftermath of the financial crisis, we discovered that CEOs of large banks (including HSBC) had no idea what was going on in parts of their far flung empires. We also found out they were too big to trust. The ongoing stream of revelations around wrongdoing in markets like <a href="https://theconversation.com/if-you-aint-cheating-you-aint-trying-how-forex-has-changed-42198">foreign currencies</a> and LIBOR – the rate at which banks lend each other short-term money – show that bad behaviour appeared endemic in certain parts of these global giants. </p>
<p>Now shareholders are beginning to ask whether these giant universal banks are too big to succeed. With costs of bad behaviour mounting and many lines of business less profitable than before, shareholders are asking whether big banks should be trying to be everything for everyone. It seems that the universal banking model has failed.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=356&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=356&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=356&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=447&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=447&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=447&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Cashing out of Turkey.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/faceme/7888539576/in/photolist-7rPZ5g-d25PZ3-pw74Xd">FaceMePLS</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The announcement by HSBC that it is cutting 25,000 jobs across the world, 8,000 in the UK, selling operations in Turkey and Brazil and shrinking its investment bank are an important part of moving away from this model. Underneath this is the recognition the bank can’t do everything for anyone. Instead, if banks like HSBC are to be trusted, profitable and sustainable they need to focus on a few markets where they have genuine expertise.</p>
<h2>A benefit for all?</h2>
<p>A more focused bank may look appealing to investors and regulators. But if we are to believe recent research, a smaller banking sector may actually <a href="http://www.ft.com/cms/s/0/64c2f03a-03a0-11e5-a70f-00144feabdc0.html">be good for the wider economy</a>. However, this focus is unlikely to appeal to staff who will lose their jobs. The UK government must be rightly nervous about losing HSBC, which is one of the country’s biggest tax payers and an important employer. Many of the other large banks are engaging in similar processes of shrinking their scope and balance sheets. </p>
<p>But the big question which remains is whether closing a few lines of business and a little restructuring will do enough to bring back diversity to the banking sector. Creating real diversity in this sector probably means not just slightly smaller global banks – it means ensuring there are a wide range of business models. The risk is that we simply end up with a small number of global giants with oversized footprints. Creating new business models to replace the universal banks is one of the biggest challenges of our time.</p><img src="https://counter.theconversation.com/content/43034/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Is the business models which large banks have relied upon for the last three decades dead?Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/421982015-05-21T13:19:37Z2015-05-21T13:19:37Z'If you ain't cheating, you ain't trying' – how forex has changed<figure><img src="https://images.theconversation.com/files/82546/original/image-20150521-5925-4sc3pc.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Rigged.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/125992663@N02/14600957805/">www.vpsi.org</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>“If you ain’t cheating, you ain’t trying” were the <a href="http://www.reuters.com/article/2015/05/20/banks-forex-settlement-traders-idUSL5N0YB3Q820150520">words</a> of one trader working in the foreign exchange market. They belie an attitude that was widespread among traders in this market between 2009 and 2013. Cheating was simply a normal part of a trader’s day job. In fact, not cheating would be to shirk your duties. </p>
<p>Widespread cheating in the foreign exchange market has turned out to be very costly indeed. In the past six months, six large banks around the world have paid out US$10 billion in fines over the manipulation of the global foreign exchange market. There have also been fines levied against banks for manipulating other over-the-counter markets such as <a href="https://theconversation.com/uk/topics/libor">LIBOR</a>, the <a href="http://www.ft.com/cms/s/0/c6793dca-fefa-11e4-94c8-00144feabdc0.html#axzz3alP8MVvW">ISDAfix</a> and <a href="http://www.reuters.com/article/2015/02/24/us-swiss-banks-probe-idUSKBN0LS1RW20150224">the gold market</a>. </p>
<p>In addition there have been fines for other bad behaviour by banks like <a href="https://theconversation.com/hsbc-scandal-the-uks-strict-rules-on-bank-customers-were-abandoned-at-the-border-37431">money laundering</a>, their role in the <a href="http://www.sec.gov/spotlight/enf-actions-fc.shtml">sub-prime mortgage crisis</a>, <a href="http://www.americanbanker.com/gallery/the-seven-largest-sanctions-related-fines-against-banks-1068360-1.html">violating sanctions</a>, manipulation of the <a href="http://www.bbc.co.uk/news/business-23337178">electricity market</a>, <a href="https://theconversation.com/hsbcs-swiss-tax-scandal-is-part-of-a-global-pattern-of-avoidance-37437">assisting tax evasion</a>, and <a href="https://theconversation.com/embattled-banks-hester-departs-rbs-and-lloyds-hit-by-ppi-scandal-15152">mis-selling payment protection insurance</a>. This brings the total amount of fines which banks have paid since 2008 to over US$160 billion. To put this in context, this is more than what the UK government spent on education last year. </p>
<h2>Cleaning up their act</h2>
<p>As the cost of misbehaviour mounts, banks are under increasing pressure to clean up their act. Despite widespread public cynicism, much has already changed within the banking sector. Banks have beefed up their risk function and increased oversight of traders. </p>
<p>They have also changed the “tone from the top”. Senior managers of the boom years who promoted a hard-driving, risk-taking culture have largely been replaced by bankers who talk more about ethics, careful risk management and serving the customer. A new legal regime has been put in place to hold senior bank employees personally responsible for wrong-doings on their watch. Banks are required to hold more equity on their balance sheets. There have been new laws which change the way bankers are paid, to emphasise long-term performance rather than short-term risk taking. Riskier trading and investment banking operations are being ring fenced from their more staid retail banks.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/82547/original/image-20150521-5937-wuc7b6.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/82547/original/image-20150521-5937-wuc7b6.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=490&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/82547/original/image-20150521-5937-wuc7b6.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=490&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/82547/original/image-20150521-5937-wuc7b6.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=490&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/82547/original/image-20150521-5937-wuc7b6.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=615&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/82547/original/image-20150521-5937-wuc7b6.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=615&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/82547/original/image-20150521-5937-wuc7b6.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=615&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Culture has changed.</span>
<span class="attribution"><span class="source">www.shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Problems with the market</h2>
<p>All these changes might be making bankers safer, but will they do anything to make the markets which they operate within any less likely to reward bad behaviour? We usually assume a market like foreign exchange emerges from millions of individual decisions. Changing this might sound impossible.</p>
<p>But each of these decisions are made within a particular set of constraints. These constraints are the product of deliberate policy design choices. Changing behaviour in a market like foreign exchange involves looking carefully at the design of the market and asking whether this actually does the job it is supposed to do. </p>
<p>As it currently stands, the foreign exchange market seems to be designed to create opportunities for bad behaviour: </p>
<ul>
<li><p>It is huge – <a href="http://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2014/01/24/FX_Market_Size.html">US$5.3 trillion</a> passes through the market every single day.</p></li>
<li><p>It is extremely opaque – because it is an over-the-counter market, there is no centralised point where trades are cleared and recorded. What this means is that unlike the share market, there is no single point of information about how much has been traded and at what price. </p></li>
<li><p>It is extremely concentrated. Although millions of people participate in the foreign exchange market every day, only four banks control over half the market. This effectively means that over $2.6 trillion US is traded by a couple of hundred people working for these big institutions. </p></li>
<li><p>It is almost entirely self-regulated. Although there are many laws which apply in other financial markets such as shares, regulation is almost entirely absent in currency trading. The main body which oversees the operation of the market is a panel appointed by the Bank of England whose membership is comprised of mainly currency traders. </p></li>
</ul>
<p>It is difficult to expect that a huge and opaque market, controlled by a small handful of players who self-regulate will produce angelic behaviour. </p>
<h2>Changing the design</h2>
<p>To change behaviour within this market, some of these design choices need to be revisited. If policy makers wanted to reduce the size of this gigantic market, they could place a small transaction tax on each currency trade. This would probably have the effect of driving out much of the speculative trading in currency (and related financial instruments) which makes up the great majority of the market. </p>
<p>To make the market more transparent, banks which run large trading platforms could be required to share information about the volume of trades as well as the price of trades they are making. This would reduce the information asymmetries between the large banks (who know what is going on) and others (who do not). </p>
<p>To make the market less concentrated, a centralised exchange similar to the share market could be established for currencies. This would quickly erode the advantages which large banks trading currency have from their currency trading platforms. </p>
<p>To make the market more stringently regulated, then it is possible to replace weak self-regulation by insiders with more developed regulation by an independent body. This would mean there are clear boundaries between poachers and game-keepers.</p>
<p>In the UK, the Bank of England is reflecting on some of these design choices. With its <a href="http://www.bankofengland.co.uk/markets/Pages/fmreview.aspx">“fair and effective markets review”</a>, it is looking at the design of FICC (Fixed Income, Currency and Commodities) markets. So far this has been mostly engaged with by financial firms and their representatives, and some policy options have already been pushed off the table. For instance, there is little prospect of a centralised currency exchange or a <a href="http://www.bbc.co.uk/news/business-15552412">Tobin tax</a> on currency trading. </p>
<p>Many important choices remain to be made, however. One big question is whether these crucial market design decisions will be ones that are made by market insiders and technocrats, or whether they will involve some degree of genuine democratic deliberation. This is an important question to ask. As my colleague Emilio Marti has recently argued, making decisions about the design of our financial markets in a more democratic way <a href="http://bit.ly/1FyRaiw">will lead to more just outcomes</a>. Keeping the decisions on how the biggest market in the world is designed in the hands of a small number of regulators, economists and currency traders may not lead to a fairer market.</p><img src="https://counter.theconversation.com/content/42198/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The culture of foreign exchange market has changed significantly, but problems persist with the market that make it susceptible to further transgressions.Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/419772015-05-20T16:23:47Z2015-05-20T16:23:47ZBanking excuses wearing thin as fines top US$200 billion<p>Some of the world’s largest banks have admitted criminal conduct in manipulating the global foreign exchange market and have <a href="http://www.theguardian.com/business/2015/may/20/banks-hit-by-record-57bn-fine-for-rigging-forex-markets">been fined some US$5.7 billion</a>.</p>
<p>These penalties are by no means the first for the industry, and they’re not even the first to address forex fixing – earlier fines mean the total is now at US$6.3 billion. In sum, the sanctions handed down to the banks suggest there is something very dark at the heart of banking. Fines <a href="http://www.risk.net/operational-risk-and-regulation/opinion/2367405/how-extreme-losses-will-affect-op-risk-capital-models">totalling</a> some US$200 billion (and growing) have been levied against large banks for various offences in the past five years.</p>
<p>In this latest case, Barclays, RBS, Citigroup and JP Morgan have been forced to enter guilty pleas while Swiss bank UBS was granted immunity as it was the first to report the wrongdoing. It has, however, <a href="http://www.nytimes.com/2015/05/21/business/dealbook/5-big-banks-to-pay-billions-and-plead-guilty-in-currency-and-interest-rate-cases.html?hp&amp;action=click&amp;pgtype=Homepage&amp;module=first-column-region&amp;region=top-news&amp;WT.nav=top-news">agreed to plead guilty</a> in a separate case over the fixing of LIBOR, the rate at which banks lend to each other.</p>
<p>The excuses are running out. First, banks claimed there were only a few bad apples. Rogue trader Nick Leeson, of Barings fame, was back in the news this week <a href="http://www.smh.com.au/business/comment-and-analysis/rogue-trader-nick-leeson-sounds-warning-on-chinas-stock-market-20150514-gh1q5c.html">warning</a>, of all things, about the Chinese economy. But, as with the FX Options <a href="http://www.apra.gov.au/MediaReleases/Pages/04_09.aspx">scandal</a> at National Australia Bank in 2004, it was never about individuals and, as public inquiries found, these banks were riddled with “cultural” problems from top to bottom.</p>
<p>Bankers have <a href="http://news.sky.com/story/1041739/jp-morgan-boss-says-sorry-for-london-whale">pleaded for forgiveness</a> and have been very piqued when the public have been sceptical about their sorrow. Time to <a href="http://www.tampabay.com/news/business/banking/jpmorgan-chase-ceo-says-its-time-to-move-past-financial-blame-game/1216004">move on</a> has been the cry.</p>
<p>Then along came the <a href="https://theconversation.com/watching-the-dominos-fall-in-the-libor-crisis-11358">LIBOR</a> interest rate manipulation scandal. For that, banks have paid some US$9 billion of shareholder’s money. A few mid-level staff were fired, the rest moved on.</p>
<p>This week it’s <a href="https://theconversation.com/explainer-how-bankers-fixed-forex-trades-and-why-its-criminal-37525">foreign exchange trading</a> that’s back in the headlines, with banks forced to admit they manipulated the FX markets, ultimately diddling pension funds out of millions of dollars.</p>
<h2>A litany of bad behaviour</h2>
<p>But it doesn’t end there. </p>
<p><a href="http://www.theguardian.com/business/2015/feb/10/hsbc-files-swiss-bank-aggressive-marketing-clients-avoid-new-tax">HSBC</a>, one of the largest banks in the world, is mired in tax evasion and money laundering charges and BNP, the largest French bank, was recently given an eye-watering fine of almost US$9 billion for <a href="http://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-and-pay-89-billion-illegally-processing-financial">sanctions busting</a>. </p>
<p>The big four UK banks have been landed with bills for over US$30 billion for <a href="https://theconversation.com/embattled-banks-hester-departs-rbs-and-lloyds-hit-by-ppi-scandal-15152">misselling Payment Protection Insurance</a>. And the four big Australian banks were hit with huge penalties for <a href="http://www.ird.govt.nz/aboutir/media-centre/media-releases/2009/media-release-2009-12-23.html">tax avoidance</a> by the New Zealand Inland Revenue. The scandals just <a href="http://www.smh.com.au/business/nab-takes-years-to-pay-compensation-after-investment-nightmare-20150220-13kb34.html">keep coming</a>.</p>
<p>These scandals did not happen in sequence nor out of the blue, instead they were all going on at the same time in the same large banks, the so-called <a href="http://www.financialstabilityboard.org/2014/11/2014-update-of-list-of-global-systemically-important-banks/">“Systemically Important Banks”</a>.</p>
<p>Banks could argue they have had a run of particularly bad luck, but that’s not borne out by their ever-rising profits. There definitely appears to be something going on in banking beyond what the “bad apples” excuse could explain.</p>
<p>There are solutions aplenty. From the banks the usual response has been: “Yes we did wrong, but leave it to us to clean up.” And from the regulators: “Yes they did wrong, but if we only we ask them to keep more capital, everything will be OK.”</p>
<p>But banks have not cleaned up their acts, least of all when asked to keep more capital. More capital, more risk, more taxpayer support tends to be the outcome.</p>
<h2>What’s really going on?</h2>
<p>It’s not as if banking has been taken over by a band of marauding criminals. The vast majority of bankers are in fact nice people. But nice people sometimes are trying so hard to do a good job that they don’t (or don’t want to) see something bad going on.</p>
<p>And it does appear that banking may actually make people behave badly. </p>
<p>A recent <a href="http://www.ttu.ee/public/m/mart-murdvee/EconPsy/6/Cohn_Fehr_Marechal_2014_Business_culture_and_dishonesty_in_the_banking_industry.pdf">study</a> found that banking employees are as honest as everyone else until they are reminded they are bankers, at which point they become less honest. This appears to imply that merely the mention of banking makes people dishonest. If true, this is troubling. Banking, whether we like it or not, is integral to everything we do in our daily lives.</p>
<p>If banking staff can just switch on/switch off honesty, then changing that reality means starting with the individual, not the culture, the bank nor the system. Individuals have to change.</p>
<h2>Pledging ethics</h2>
<p>One initiative that has merit in this respect is that of the Banker’s <a href="http://www.thebfo.org/home">Oath</a>. Some banks have picked up this very worthy Dutch initiative and developed an Oath, similar to the Hippocratic one, which bankers can swear. </p>
<p>Behavioural Economics teaches us that people will behave better if they are constantly reminded they have wider responsibilities than their jobs. The mere mention of the US Constitution or Bible has been <a href="http://www.wsj.com/articles/SB10001424052702304840904577422090013997320">found</a> to cause people to tell fewer lies (interestingly even if they are atheists). It appears that we all (not just bankers) need constant reminding of our moral compasses.</p>
<p>As a start (and it is only a beginning) instead of waiting for individual bankers to sign, why not put the Bankers’ Oath everywhere? On bank tellers’ windows; on their computer sign-on screens; as screen savers; on the front page of all documents; and in pay statements. And also give the text of the Oath to customers: enclosed with bank statements; on ATM screens and on the backs of plastic cards. The impact could be extended if bankers that transgressed their Oath were then openly <a href="https://theconversation.com/naming-and-shaming-helps-keep-banks-honest-38361">shamed</a>.</p><img src="https://counter.theconversation.com/content/41977/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Increased regulation is doing little to stem the tide of bank scandals, with fines racking up. It's time more bankers were held to account.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/381182015-03-03T06:23:26Z2015-03-03T06:23:26ZBankers have a moral compass, it just may not look like yours<figure><img src="https://images.theconversation.com/files/73456/original/image-20150302-5232-1o5kviz.jpg?ixlib=rb-1.1.0&amp;rect=1%2C0%2C991%2C657&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Push and pull factors. How bankers lose direction.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/daynoir/2180507211/in/photolist-btVRWn-gK19f-nU7DV5-4jFEPV-64KEwY-6eGLBQ-o5X4Ar-2ZmEjJ-6G5iTL-5n2QHe-nUJWgi-pDmGeu-De3uU-6xKyBD-dxnob7-4nVitT-2RVaF-9fYK9X-8T9tUk-9JNjcB-af6Xuw-5zSZEx-qALf6P-s2oLi-nLwSFe-pQrnr-jwfx-2biiu-aRBwLp-9FPMWK-dSZyPG-bVFeHQ-67que2-4pLmWL-7uD3a3-7muzcJ-m4C23X-6G3mMW-qACvcu-6G1dDD-7TkMGU-qQTQfG-6uXioh-pV3hWg-6xPHb3-82Uw6D-pVeWt-6ZkasQ-bPHTS-h2BVBm">dayna mason</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>We’re getting rather used to revelations about sharp practice in the banking sector. The <a href="https://theconversation.com/uk/topics/hsbc">row about HSBC’s tax services</a> to rich clients has raised, yet again, crucial questions about the business culture which allows such scandals to emerge. One common idea is that those involved have <a href="http://www.telegraph.co.uk/news/uknews/9510087/Banks-have-lost-their-moral-compass-consumer-group-warns-new-industry-chief.html">lost their “moral compass”</a> and succumbed to the <a href="http://www.theguardian.com/commentisfree/2012/jul/02/bankers-greed-brain-changes">imperative of pure greed</a> as they employ subterfuge to do things which end up doing harm to the general public.</p>
<p>There is a problem with these approaches. Those who use the “greed-hypothesis” tend not to define what they mean by “greed”, as distinct from normal material interest or motivation, nor do they have empirical data to show how greed operates to cause all this turmoil in our economy. But that is for another day perhaps, as here I want to focus on the “immorality-hypothesis”; to unpack it and argue that fraud in the City does not, in fact, reveal the absence of morals, but the presence of particular moral views and preferences.</p>
<p>You and I might dislike those moral mind-sets and priorities, but exploring them is essential if we are to understand banking. </p>
<p>This poses an intriguing question: what are these morals, where do they come from and why have they apparently become dominant in some businesses and sectors?</p>
<h2>Noble pursuits</h2>
<p>First, consider this <a href="http://www.michaelmeacher.info/weblog/2015/02/establishment-bang-rights-hsbc-swiss-bank-leaks/">recent statement</a> by Labour MP Michael Meacher:</p>
<blockquote>
<p>The revelations of greed and cynical immorality … keep pouring out of this HSBC Swiss bank scandal, one of the biggest of the last few decades since this is probably only the tip of the iceberg on bank wrongdoing in this no-holds-barred era of crooked capitalism.</p>
</blockquote>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=502&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Glowing. HSBC.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/aniamendrek/15503079172/in/photolist-dArJ7p-5RAkr-St4W7-ppZEHM-aQi7Wg-pBXkju-py6vJK-22Eebj-jRdTuM-i8hBf3-j7mfCG-pgT9AQ-jRafKZ-7Lv7um-anwFFJ-6UtzrY-b3EM62-b3EMEM-b3ELr8-99af8Z-6wCWkS-oSU6K4-p6XvRk-8ecDzA-3e5Cq-9hDaY9-bxpgEo-4R9avb-8v9xZM-7YjgGe-6aNCTD-aes6ye-3c9NTJ-6wyMGZ-dAvFc7-aQi8Gk-aH91nK-aQq8UR-fvMLyY-b4JbvH-8sU81R-8HuNLJ-b3ERwn-6vbHHb-ea86tD-8KHGmV-4SwyaF-b3EGN8-b3EGh4-b3EFKH">Ania Mendrek</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Here greed, cynicism and immorality explain “wrongdoing”. This analysis typically leads commentators to suggest that business needs to find that lost moral compass and adopt a moral business purpose. The idea is that a form of fair capitalism and just society will arise. </p>
<p>Will Hutton is a prototypical writer of this category: he suggests companies should deliver <a href="http://www.theguardian.com/business/2015/feb/11/british-capitalism-broken-how-to-fix-it">“a noble, moral business purpose”</a> which works to the service of humankind. The implicit assumption is that fraud is not what organisations and professionals with a moral purpose and compass do. </p>
<p>In 2012, Hutton made this line of argument in <a href="http://www.theguardian.com/commentisfree/2012/jun/30/will-hutton-barclays-banking-reform">a commentary about interest rate rigging</a> in the banking sector:</p>
<blockquote>
<p>Much has been said about the rotten culture in investment banking … [T]he regulators, the British government and bank managements … allowed a business model to be created in which men and women with very little skill and no moral compass could make themselves millionaires in a very short time. They contributed zero wider economic value but created immense systemic risk for the rest of the economy.</p>
</blockquote>
<p>The way forward for the likes of Hutton – including <a href="http://www.earthinstitute.columbia.edu/sitefiles/file/Sachs%20Writing/2012/FinancialTimes_2012_SelfInterestWithoutMorals_01_18_12.pdf">his academic counterpart Jeffrey Sachs</a> – looks straightforward. End out-of-hand greed and self-interest and inject morals into capitalist corporations and sectors. </p>
<h2>God’s Work</h2>
<p>However, what if the opposite is the case? Errant bankers have a moral compass too, and even banks <a href="http://www.sec.gov/spotlight/enf-actions-fc.shtml">fined and admonished by regulators</a> are organisations with moral norms, codes and priorities of one sort or another. That is to say, white-collar fraudsters will have their take on matters of right and wrong, proper and improper practice as well.</p>
<p>They have views on justice, honesty and decency too, or on what a good life and good society looks like, on how to live, earn an income and keep the job, and what all that means for matters of <a href="https://www.hofstra.edu/pdf/Academics/Colleges/HCLAS/CLD/CLD_RLR_f04_cheating.pdf">acceptable and unacceptable business practice</a> in their line of work. It’s why you get <a href="http://www.nytimes.com/2008/07/09/business/09credit.html?%0Aadxnnl=1&amp;adxnnlx=1303412194-BNurm1fBKXFVJ7cIwkXGVg&amp;_r=0">ratings agency staff saying</a>: “Let’s hope we are all wealthy and retired by the time this house of cards falters”. And why <a href="http://www.bbc.co.uk/news/business-26552995">Goldman banker Fabrice Tourre</a> told his girlfriend:</p>
<blockquote>
<p>[The subprime business] is totally dead and the poor little subprime borrowers will not last so long!!!… <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7626096/Goldman-fraud-charges-emails-from-Fabrice-Tourre-to-girlfriend-Marine-Serres.html">I am now considered a ?dinosaur?</a> in this business… I feel like I’m losing my mind and I’m only 28!!! OK, I’ve decided two more years of work and I’m retiring.</p>
</blockquote>
<p>There are similar tales in emails and instant messages released <a href="http://blogs.wsj.com/moneybeat/2015/01/12/bros-or-insider-traders-ex-wells-fargo-colleagues-seek-to-dismiss-sec-case/">alongside other cases</a>. We see moral views that lead people to justify their actions: “Everybody’s doing it”, “If I don’t do it somebody else will”, “I can’t afford to be nice”, “I need to do this because I need this job for my family”, “I serve the interests of our <a href="https://theconversation.com/fixing-the-hole-in-the-heart-of-corporate-capitalism-35515">shareholders</a>, including pensioners”, or even (paraphrasing <a href="http://blogs.wsj.com/marketbeat/2009/11/09/goldman-sachs-blankfein-on-banking-doing-gods-work/">Goldman Sachs CEO Lloyd Blankfein</a>) “I am doing God’s work”. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" srcset="https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=405&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=405&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=405&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=509&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=509&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=509&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Prophet of doom? Lloyd Blankfein.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/worldeconomicforum/8412684247/in/photolist-7ZcGBY-7SQTFg-fmynxa-aVkxbp-7gekkG-aBED8q-aBEDEw-aBBYpt-asV8s8-asXKDf-asV8fH-eod1ci-bX5egc-bX5ehD-8NEcn1-dPpcw4-asSdWx-asSe8i-4nTWcL-4uW8qc-dq59Bm-dPpcW8-dPuQCm-7g91yx-dPpcNg-dPuQGJ-jsTb7M-dq59tG-dq4XUK-kg6hP4-dq4X3t-7gcVwG-pXKehg-pFjtm8-gH8BSq-gH9Cfr-7aMfXY-eR7bX3-gH8Xb7-gH8Bum-gH8RXG-dpTuph-dq4YcF-dq58tj-dq511i-dpTukU-dpTunf-bEcari-7g91wn-brhig1">World Economic Forum</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>In other words, a moral norm does not automatically prescribe a pro-social, honest practice. In a particular case, the existing dominant morals among the actors involved – notions of what constitutes acceptable practice, and how others should be treated while earning a living – can be that it is OK, proper, or crucially, necessary to defraud (and therefore harm) another human being, social group or organisation. </p>
<p>The motivation might be anything from meeting a company target, to keeping your job or defending/advancing your position and that of your family, corporation, social group, region, country, religion, and so on. Sounds familiar? </p>
<h2>Denormalising</h2>
<p>Fraudsters in banking and related industries – as well as their numerous clients – are not operating in a moral vacuum. They are also, after all, likely to operate within the dominant value system of capitalist society; they probably aspire to wealth, achievement, self-direction, or enjoyment. And if the way to combat fraud and corruption <a href="https://plutopress.wordpress.com/tag/how-corrupt-is-britain/">is to understand it better</a>, then we need to explore the entire spectrum of key existing moral rationales and dynamics in the professions, firms, organisations and sectors of concern.</p>
<p>We need to understand the systems of pressures and incentives – including the power dynamics – that facilitate fraud, and understand the values and norms that justify it. To say bankers are amoral is analytically flat and limits the enquiries and debates we should actually be having. </p>
<p>Start from the analytical position that “bankers have morals”, and the moral compass they use is located firmly in the magnetic field of late capitalism. This may not be an easy analytical move, but is essential to identify and discuss, as well as critique and de-normalise the morals of the white-collar fraudsters in high finance, and elsewhere.</p><img src="https://counter.theconversation.com/content/38118/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jörg Wiegratz receives funding from British Academy/Leverhulme Trust/Sir Ernest Cassel Educational Trust Fund.
</span></em></p>If we keep saying high finance is operating in a morality vacuum, we will miss the chance to understand and fix its problems.Jörg Wiegratz, Lecturer in Political Economy of Global Development, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/358512015-01-05T23:16:11Z2015-01-05T23:16:11ZYears on, ASIC still grappling with swap rate fixing scandal<p>The wheels of justice grind exceedingly slow and nowhere slower than in the Sydney headquarters of the Australian Securities and Investments Commission (ASIC). A recent <a href="http://www.smh.com.au/business/anz-traders-sidelined-during-asic-inves">report</a> appears to show that ASIC is still, just under two years after the events, following leads on possible manipulation of the Australian interest rate benchmark, the Bank Bill Swap Rate (BBSW). </p>
<p>We know the BBSW was manipulated as evidenced by an <a href="http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-014mr-asic-accepts-enforceable-undertaking-from-bnp-paribas/">enforceable undertaking</a> by the French bank BNP-Paribas almost one year ago. What we don’t know yet is whether there was any evidence of involvement by Australian banks and, if so, to what extent? But it would not come as a complete surprise if <a href="https://theconversation.com/dont-believe-the-hype-our-own-libor-scandal-could-be-in-the-wings-12652">local banks had been involved</a>.</p>
<p>However, the question of whether Australian banks were involved or not in manipulation is irrelevant. There was indeed manipulation and it went unreported to ASIC until overseas regulators began to investigate manipulation of the widely used <a href="https://theconversation.com/watching-the-dominos-fall-in-the-libor-crisis-11358">LIBOR</a>benchmark. There are two scenarios. First, local bankers (as the major players in the BBSW market) knew there was manipulation and did nothing, benefiting from the outcomes. Alternatively, they did not know of the manipulation, in which case they come across as provincial dopes. Either way the Masters of Martin Place do not come out of the scandal very well.</p>
<p>After strenuously denying for years that the BBSW could possibly be manipulated, the Australian Financial Markets Association (AFMA) changed the BBSW <a href="http://www.afma.com.au/standards/market-conventions/Bank%20Bill%20Swap%20%28BBSW%29%20Benchmark%20Rate%20Conventions.pdf">calculation methodology</a> in July 2013 to one which collected live rates from the market, rather than expert opinion, to calculate the benchmark. Supposedly this would be <a href="https://theconversation.com/is-there-egg-on-the-rbas-face-13136">less prone</a> to manipulation. How wrong they were.</p>
<p>Just last November, in what was obviously a coordinated effort, regulators in three countries <a href="http://www.bloomberg.com/news/2014-11-12/banks-to-pay-3-3-billion-in-fx-manipulation-probe.html">announced fines</a> of more than US$4.3 billion on six banks found to have manipulated the most widely used benchmark in the global Foreign Exchange (FX) market. As with LIBOR, manipulation of the London “WMR 4 o’clock FIX” was long running, widespread and profitable. But unlike LIBOR, the “FIX” was calculated from live market rates, and supposedly manipulation-proof. But human ingenuity and greed finds ways around such trivial obstacles.</p>
<p>The regulators found that traders from the world’s largest banks colluded, through conversations in internet chat rooms, to “nudge” the FX market in a particular direction to benefit their own positions rather than their customers. Traders found that it was sufficient to manipulate the market for only about 60 seconds “around the FIX” to generate illicit profits. </p>
<p>In its <a href="http://www.bis.org/publ/rpfx13.htm">latest triennial survey</a> of activity in the FX market, the Bank for International Settlements (BIS) found that the Australian dollar was one of the top five most traded currencies accounting for some 8.6% of overall volume. Although the initial fines concentrated on manipulation of the major currencies (the US dollar, the Euro and the British Pound) it stretches credibility to believe that traders did not also manipulate the Aussie benchmark rate. In fact, because of the time at which the benchmark was calculated (4pm GMT), the local markets would have been closed and hence, because there was less competition, the benchmark would have been easier to fudge.</p>
<p>Why is such manipulation important? Australian superannuation funds that have an international component, such as US shares, are regularly revalued against the market, often on a daily basis. Any manipulation will then directly affect the value of the funds, sometimes up and sometimes down, but most often to the benefit of the banks rather than pensioners.</p>
<p>Under Chairman Greg Medcraft, ASIC has announced <a href="http://www.ft.com/intl/cms/s/0/51e79260-af26-11e3-bea5-00144feab7de.html#axzz3NusDo4TK">an investigation</a> into possible manipulation of FX benchmarks, which is due to complete sometime early this year. And in a recent chat with journalists, Medcraft declared that Australia was a “<a href="http://www.afr.com/videos/national/medcraft-australia-paradise-for-white-collar-criminals-4yadc5ctryjjokkc4gd3biiv2dka_a0q.html">paradise for white collar criminals”</a> a comment he <a href="http://www.abc.net.au/news/2014-10-23/asic-backtracks-on-corporate-crime-paradise-comments/5835194">then backed away from</a> after being contacted by the finance minister Mathias Cormann.</p>
<p>At this stage it would be customary to call for an in-depth inquiry into the banking industry and its ethics, but in the wake of the toothless tiger that was the <a href="http://fsi.gov.au/publications/final-report/">Murray Inquiry</a> which had only one reference to LIBOR (in relation to Withholding Tax), such a suggestion would fall on deaf ears. Medcraft has repeatedly made a strong push for additional funding for ASIC and heeding him, the Murray Report has recommended that an “industry funding model” be introduced - that is, “abuser pays”.</p>
<p>If the ASIC inquiry finds evidence of misconduct (and arguably even if it doesn’t in this particular case), the government should promptly allocate all of the funding that the corporate regulator needs. And, more controversially, ASIC, because it is too thinly spread, should be broken up to allow it to concentrate on preventing misconduct in the Australian financial system, if indeed it is such a paradise for white collar criminals.</p>
<p>Less controversially, AFMA is a trade association, governed by its members, the largest banks in Australia and the world. There is an obvious conflict of interest in also being the administrator of the BBSW benchmark. As in the UK, that responsibility should be delegated to <a href="https://www.theice.com/iba">an independent body</a>.</p>
<p>It is also a conflict of interest for any industry body to set the code of conduct for its members’ employees. Though AFMA’s <a href="http://www.afma.com.au/afmawr/_assets/main/lib90010/afma%20code%20of%20ethics%20code%20of%20conduct.pdf">code of conduct</a> specifically forbids market manipulation, the Board contains senior representatives of banks that have been fined for both FX and LIBOR manipulation. Furthermore, the AFMA code has not been updated since the revelations of wide-spread market manipulation; it is bland and ineffectual. ASIC should ensure that proper conduct including financial benchmarks is part of each firm’s corporate code of conduct and is strictly enforced by them.</p><img src="https://counter.theconversation.com/content/35851/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The wheels of justice grind exceedingly slow and nowhere slower than in the Sydney headquarters of the Australian Securities and Investments Commission (ASIC). A recent report appears to show that ASIC…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/344632014-11-20T06:07:46Z2014-11-20T06:07:46ZBankers will lie at the toss of a coin – but only when at work, says new study<figure><img src="https://images.theconversation.com/files/65019/original/image-20141119-31615-tqhuqq.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Heads or tails this banker will cheat.</span> <span class="attribution"><span class="source">Nomad_soul via shutterstock</span></span></figcaption></figure><p>There is something in the culture of banking that lends itself toward making otherwise fairly good people do bad things. That’s the finding of a <a href="http://www.nature.com/nature/journal/vaop/ncurrent/full/nature13977.html">new study published in the journal, Nature</a>. And it may simply confirm the suspicions of many following endless news of bankers being outed for bad behaviour. </p>
<p>The list is almost too endless to mention (but here goes anyway): manipulating the foreign exchange market, LIBOR and the gold market; mis-selling interest-rate swaps, mortgage backed securities and payment protection insurance; aiding money laundering; disregarding sanctions on a country; tax avoidance; providing compromised investment advice; trading scandals – the list could go on. </p>
<p>In total, these fines have directly cost banks <a href="http://www.ft.com/cms/s/0/802ae15c-9b50-11e3-946b-00144feab7de.html#axzz3JWuNg6zV">more than US$100 billion in the US alone</a>. Some have suggested this could soon bring the total bill for fines <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11228773/The-banking-industrys-bill-for-bad-behaviour-300bn.html">since 2008 to more than US$300 billion</a>. </p>
<p>And, however astronomical this number sounds, the fines are just the start of it. There are legal fees, processes of internal change, consultants and, of course, new risk and compliance departments which need to be paid. On top of this, there are huge reputational costs. One recent study of UK banks found that for every £1 they paid out in fines <a href="https://econresearch.uchicago.edu/sites/econresearch.uchicago.edu/files/paper.pdf">they lost £9 off their share price</a>. So banks would probably do well to address this seemingly fundamental issue of having a corrupt culture, as shown in this study.</p>
<h2>The study</h2>
<p>Economists at the University of Zurich, Michel Maréchal, Alain Cohn and Ernst Fehr, set out to learn whether bankers are in fact more likely to cheat. They particularly focused on whether people who consciously thought of themselves as bankers (and acted under this moniker) were more likely to cheat than when they had their non-professional hats on. They suspected it was something about the identity of being a banker that made people more likely to cheat. </p>
<p>To test this question, they asked a group of people working for a financial organisation to complete a simple questionnaire. The respondents were divided into two groups. The first was initially asked a set of questions about their job as bankers (such as which division they worked in). The second was asked about their everyday life (such as how much television they watched). This primed the first group to think of themselves as “bankers”; the second as “everyday people”.</p>
<p>After this step, both groups were then asked to play a simple game. They were asked to flip a coin ten times and record their results. Before they flipped the coin, they were also told if you got heads (for instance) you will receive US$20. Because it was an online test, no-one could check the results – so there was lots of room for lying. </p>
<p>The results were surprising. The people who were primed to think about themselves as an everyday person did not lie about their results (despite the fact there was ample room to do so). But the group who were primed to think of themselves as bankers tended to lie significantly more – they misrepresented their results about 16% of the time and more than a quarter of the “bankers” group cheated.</p>
<p>Much of this lying and cheating can be attributed to the small population of bankers who were quite happy to lie in almost every flip of the coin if it benefited them. But the study indicates that by simply prompting a person in the financial services industry to think about themselves as a banker means they are more likely to cheat. </p>
<h2>Identity is the crucial factor</h2>
<p>At this stage you might object, and say that identity is not the crucial factor at work here. Maybe it was just thinking about money which led to bad behaviour? The study also tested members of other professions who, when prompted to think about themselves in professional terms, did not lie and cheat more. There was no difference among the cheaters and non-cheaters in terms of competitiveness. </p>
<p>Cheating was also not simply the result of people thinking that everyone else was doing it and so it was OK. What seemed to prompt bankers to cheat on this test was when they thought of themselves as bankers.</p>
<p>What is more, it is not just that people who identify as bankers tend to lie and cheat more than the general population. In fact, the study showed that this behaviour was expected of them by others. This can be seen when participants were asked how often they thought bankers would cheat on this test (when compared to other interest groups). Respondents tended to think that bankers would cheat more than prison inmates on the test. This says something for what expect of the people we trust with our money. </p>
<h2>Profound implications</h2>
<p>This neat experiment has some profound implications for how banks are run and regulated. It suggests that one of the reasons why banks might be such cesspits of bad behaviour is not the actual people working in them – who act morally when they’re not in working mode.</p>
<p>So, while rejigging balance sheets with the fines that have recently been meted out is important, it is unlikely to fix underlying cultural issues in the banking industry. It is possible to begin to fix the problem by identifying people who are extreme cheaters and are likely to lie on every occasion possible. Simple tests might weed these individuals out. </p>
<h2>Changing the definition of a banker</h2>
<p>But to address the deeper-seated cultural issues, it is crucial to change this “banker” identity. There may be some ways to do this. In the short term, banks might consider removing various prompts within their institutions which encourage their employees to think about themselves as bankers. </p>
<p>These identity prompts might include all the paraphernalia we associate with banks like their slick corporate headquarters down to constant flashing share prices and images of money. And the prompts that encourage other identities at work could be increased. For instance in some banks, employees are now asked whether they would be proud of selling a product to a family member. </p>
<p>It is also possible to encourage employees not to think about themselves as a banker. Some new retail banks encourage their employees not to think of themselves as bankers but as “advisors” or even “hosts”. </p>
<p>In the long-term, however, it is necessary to change what it means to be a banker altogether. Things like “Greed is good” and associations with winning at any cost might be downplayed. Other characteristics, such as being trustworthy and having integrity could be played up. Over time this would hopefully lead to bankers thinking about their collective identity in a different way. And the result would, hopefully, be that when they are faced with a situation where no one is looking, they do the right thing – like the rest of the population usually does.</p><img src="https://counter.theconversation.com/content/34463/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There is something in the culture of banking that lends itself toward making otherwise fairly good people do bad things. That’s the finding of a new study published in the journal, Nature. And it may simply…Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/311512014-09-17T05:15:50Z2014-09-17T05:15:50ZBanks pay a heavy price for the crisis, but fail to count the cost<figure><img src="https://images.theconversation.com/files/59027/original/wdzjw38d-1410777477.jpg?ixlib=rb-1.1.0&amp;rect=136%2C99%2C795%2C513&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Why is the City keeping its suffering under wraps?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/robhawkes/2685795580/in/photolist-nFZ5sv-9D3MJo-56kpsm-e3b4yr-gMeZjQ-bB7S5W-bQ2wu8-heMWfy-g1pJP-e3gU1W-g1u1u-e3gR7o-e3b2Jp-e3gPij-e3b3Gt-e3gVJA-e3gNuu-e3gQfJ-g62gw-g1m5y-g1vUc-g1guV-e3gUGf-g1mwc-g1gXo-g1nyp-g1uBp-g1nbJ-e3b21c-e3h11q-e3gXkf-e3gWfb-g68q9-g63vE-g6cSJ-g6epK-e3gXL9-e3gZjy-g62KU-dofmHT-g1sA3-g66hm-g68aA-g63KB-g1sPq-g1qiT-g1rta-e3gVdy-g1qUG-9q813t">Robin Hawkes</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The major international banks are being lumbered with more and higher fines as the fallout from the financial crisis continues. Our research as part of the Conduct Costs Project at the CCP Research Foundation is providing evidence of the escalating financial penalties, but the banks remain mute and there needs to be much more to the sector’s renaissance than a simple shaming through sanctions.</p>
<p>For the five years to the end of 2012 the conduct costs for ten key banks were at just under £150 billion. For the five years to the end of 2013 they were just under £160 billion. The figures for the period ending 2014 cannot be produced yet, of course, but this year has already seen record costs <a href="http://dealbook.nytimes.com/2014/08/21/bank-of-america-reaches-16-65-billion-mortgage-settlement/">imposed on Bank of America</a> – $16.65 billion (£10.3 billion) – for mis-selling mortgage-backed securities (MBS) and a <a href="http://www.bbc.co.uk/news/business-28099694">massive $8.9 billion fine</a> slapped on BNP Paribas (much to the consternation of the French government) for violating US sanctions against doing business with some pretty unpleasant regimes.</p>
<p><a href="http://dealbook.nytimes.com/2014/07/14/citigroup-and-u-s-reach-7-billion-mortgage-settlement/">Citigroup took a $7 billion hit</a> over MBS and <a href="http://www.ft.com/cms/s/0/23a009e6-1713-11e4-8617-00144feabdc0.html#axzz3DNJxOcGF">UBS took around $300m on the chin</a> to settle a German case about assisting tax evasion. Space is tight, but there are plenty more: <a href="http://blogs.reuters.com/financial-regulatory-forum/2014/09/09/standard-chartereds-aml-lapses-provide-crucial-lessons-on-internal-controls/">Standard Chartered’s money-laundering issues</a>; <a href="http://www.bbc.co.uk/news/business-28528349">Lloyds and LIBOR</a>….</p>
<h2>Measuring the pain</h2>
<p>We started the Conduct Costs Project, around two years ago, because no one was keeping a log of these massive fines, compensation payments and other costs associated with misconduct. No national regulator or international body, seemed to think it would be of interest to the public or relevant to how we assessed banks’ post-crisis behaviour. </p>
<p>However, at a time when banks are telling the public that they want to regain our trust, surely the track record of those facing regulatory action is an important indicator as to just how trustworthy they actually are? And our net is spreading; the study will cover more than 20 international banks by the end of this year. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" srcset="https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=400&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Banks take note.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/siggichurchill/2513243382/in/photolist-4Q62Gs-58HULC-L47CE-6WiDQg-5HURN9-cp5rn9-e3S3J2-aWsAc-aVv7e-aWswM-ovZe1B-7SgSdu-L47Gm-4RhNLL-RDtHo-37GwC6-6ziANS-6zewKe-9bQiyS-5AxiC4-5AxixM-5zjWKK-5z8FDf-5zhj4Y-4RR7Ab-5Axi8i-5zd2W2-9fGHUb-81HJvg-HK3zi-5sfuwD-4KLmu8-5zd2kX-aweXuC-5zhjTd-5zd1Vc-5ABykW-5zhjqA-5AxhTc-5ABxY9-5zoF79-5zhinw-5zhiZw-5zhiBu-5zd2FR-5zhiq7-5zhjkm-5zhium-5ABxeS-enqbiF">Siggi Churchill</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>It amounts to more than just the airing of banks’ dirty laundry and it is not something that they should approach with antipathy. There are lessons here in respect of the link between conduct and culture; the benefits of ethics-led decision making; the best practice for bank governance and conduct risk management; the unintended consequences of regulatory enforcement trends; and a means by which the restoration of trust and confidence in banks can be measured and compared. </p>
<p>It is clear, for a start, that investors and other stakeholders are beginning to take seriously the implications of conduct risk and to understand just how useful it can be to have a transparent approach to the costs involved. The industry, however, is lagging behind: banks on the whole are not making use of the intelligence and trends available from their own data. They are not sharing their experiences or discussing the grey areas that, contrary to what appears to be prevailing policy, should not be approached in a proprietary way, but should be part of an industry-wide debate. Effectively managing conduct risk and building stakeholder trust and confidence is not a matter for competitive advantage. </p>
<h2>Be damned and publish</h2>
<p>The authorities are beginning to catch on. The European Banking Authority is reported to be about to publish <a href="http://www.bloomberg.com/news/2014-08-20/eba-to-show-bank-losses-from-fines-in-stress-test-results.html">at least some information about EU bank fines</a> when it publishes the results of its “stress tests” later this year. This, we hope, might shed some much needed light on a very shady area in respect of misconduct disclosure – the fact that Eurozone regulators are being very secretive about how and when they discipline their banks. In the UK, the Banking Standards Review has acknowledged that conduct costs can serve as a “metric” for measuring a bank’s success in operating as a more professional, ethically based institution. </p>
<p>It is true that some of the conduct costs data relate to “legacy issues” and at least some of the banks may have a case for saying they are now better than they used to be. Even a very large fine recorded in 2014 may not be a wholly reliable indicator of how good or bad a bank is in 2014. However, the task of interpreting the numbers is not helped by the banks’ habit (to some extent, encouraged by regulators) of refusing to give the public any meaningful comment about fines when they are levied. In most cases, all we hear is: “thank heavens that’s all over and done with; now we can put it behind us and move on”. </p>
<p>You can’t help feeling that a bank which provides the public with such glib, virtually empty announcements after parting with humongous sums of money due to misconduct has not yet really got the message.</p>
<h2>Getting trust up</h2>
<p>So what exactly is the message? Banks could perhaps begin by asking themselves, individually and as a sector, some of the questions that seem to keep being ignored. Try this. If you are genuine in your protestations that you want to regain public trust, what would you say you need to do to earn it? Is it just a question of “keeping a clean sheet” and staying out of trouble for as long as possible? Or do you need to show that you have actually changed in a more tangible, evidence-based way? How would your employees describe their duty of care to your bank and to your retail clients – and to the institutions on the other side of your deals. How about the duty of care to the broader market or the public?</p>
<p>Here’s a scenario that might give a banker some food for thought. Supposing the institution on the other side of a deal has made a fundamental error in its understanding of a transaction’s documentation, such that, if it is not alerted, it will lose (and you will gain) a very large sum of money. Do you tell them? Is it really just tough luck if they don’t spot the problem? </p>
<p>Would your answer be different if the counter party was represented by a friend of yours? You know that if you don’t say anything they might lose their job and have to sell the family house. Happy to stay silent? If you give a different answer to the two scenarios, how do you rationalise that? Is it because you have a greater duty to a friend than to a relatively “anonymous” counter party? How does this reflect on your broader duties to the market, bearing in mind your CEO’s statements about your integrity and ethical awareness? </p>
<p>We don’t have the answers to all questions of this kind but what we do know from conversations with market participants is that banks need to think more deeply about them than they have been. And this needs to be done in a manner visible to the public; not only individually but across the sector.</p>
<p>Collective discussion and agreement on how to respond to the “difficult” grey areas in ethics is a hallmark of “professional” behaviour that we see across all the classical professions. The banks need to think about how this should translate to problem areas as a matter of urgency. Faced with the drama and public flogging of massive fines, the greatest danger is complacency as to the size of the tasks that still have to be undertaken. The banking business model is changing, as is the standard of behaviour that the public expects. The message, in short, is that we want to see real change for the better: fine words (and fines) will not be enough.</p><img src="https://counter.theconversation.com/content/31151/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roger McCormick is affiliated with the Conduct Costs Project at the CCP Research Foundation. He has no other relevant affiliations or funding.</span></em></p><p class="fine-print"><em><span>Chris Stears is affiliated with the Conduct Costs Project at the CCP Research Foundation. He has no other relevant affiliations or funding.</span></em></p>The major international banks are being lumbered with more and higher fines as the fallout from the financial crisis continues. Our research as part of the Conduct Costs Project at the CCP Research Foundation…Roger McCormick, Visiting Professor, London School of Economics and Political ScienceChris Stears, PhD Candidate , Institute of Advanced Legal StudiesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/132912013-04-08T20:34:56Z2013-04-08T20:34:56ZAfter a long line of financial disasters, UK banks on regulatory change<figure><img src="https://images.theconversation.com/files/22174/original/j5xg62ps-1365397815.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">The City has been plagued by financial disasters. Will the replacement of the Financial Services Authority with two new banking regulatory bodies be enough to stop the rot?</span> <span class="attribution"><span class="source">AAP Pictures</span></span></figcaption></figure><p>If the UK Financial Services Authority (FSA) had been a dog, it would have been about 86 years old when it was put down on April Fool’s Day this year. Uncharitably, some say that the FSA, the lead regulator for UK banks and insurers, was indeed a mutt that should have been dispatched long ago.</p>
<p>The short life of the FSA was book-ended by financial disasters.</p>
<p>After the failure of the venerable <a href="http://www.prmia.org/pdf/Case_Studies/Barings_Case_Study.pdf">Barings Bank</a> in 1995, regulation (or more correctly, self-regulation) of the banking industry in the UK was ripped away from the Bank of England (BOE) and the new FSA was given regulatory responsibilities by the Financial Services and Markets Act of 2000.</p>
<p>The FSA was brought undone, less than ten years later, by a number of financial debacles, not least the <a href="http://www.fsa.gov.uk/pubs/other/nr_report.pdf">Northern Rock</a>, <a href="http://www.guardian.co.uk/business/2012/nov/01/lloyds-ppi-mis-selling-5bn">PPI</a>, and <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6289-12">LIBOR</a> scandals. As a result, the FSA was unceremoniously broken up by the UK government in the Financial Services Act of 2012.</p>
<p>The responsibilities given to the FSA by the UK Parliament, in 2000, were extensive and probably too broad. The FSA was not only responsible for regulating all banking and insurance corporations in the UK, but also for companies that operated investment and pension schemes. In its capacity as the UK Listing Authority (UKLA) , it was also responsible for ensuring that securities, such as equities, were issued by authorised firms. In 2012, the FSA employed about 4,000 staff in its many divisions to perform all of the functions allocated to it.</p>
<p>The main role of the FSA was as a “prudential” regulator, primarily concerned with maintaining financial stability and market confidence in the UK financial system. It also had secondary responsibilities for consumer protection (with regards to financial products) and the reduction of financial crime. The FSA exercised these <a href="http://www.fsa.gov.uk/pages/about/aims/statutory/index.shtml">statutory objectives</a> by setting so-called “prudential standards”, which involved ensuring that banks and insurers were adequately capitalised for the risks that they were taking and were properly reporting their risks to their shareholders. Clearly, the FSA failed in its basic prudential regulation as some of the UK’s largest banks went to the wall during the GFC.</p>
<p>The FSA’s remit was enormous. But it should be remembered that regulators do not choose what they do, but are chartered by governments to do what governments want to do. If the job of overseeing the many thousands of UK financial companies, large and small, was too big for the FSA, it was the fault of the UK government and parliament, not the regulators themselves.</p>
<p>Interestingly, the FSA was not funded by the UK government, but by the firms that it regulated, through imposition of levies. Such a funding model is not without problems, as it would encourage any regulator to expand its remit rather than focus on the areas of greatest financial risk.</p>
<p>So what went wrong?</p>
<p>In the aftermath of so many scandals, it is extremely difficult to remember back to the halcyon days of banking before the GFC. Back in 2006, the landscape of banking was very different.</p>
<p>For a start, it was assumed that banks would compete fiercely with one another but would deal with their customers and shareholders honestly, or at least not do harm to them. Why on earth would anyone want to harm their own customers, since that is the very source of their long-term profitability?</p>
<p>Such an idea had to be unthinkable, but that is exactly what happened in many banks around the world. Take Goldman Sachs, which sold securities to “valued customers”, while at the same time <a href="http://www.sec.gov/news/press/2010/2010-123.htm">betting against</a> those very securities. If only Goldman had been the exception — but it was not. Almost every major bank in the world has been accused in the past few years of similar wrongdoing, if not on the same gob-smacking scale.</p>
<p>As private companies, banks were impervious to criticism before the GFC. As Lord Turner, last chairman of the FSA, told legislators, the hands of the regulators were tied:</p>
<blockquote>
<p>“The global philosophy of regulation which was based upon too extreme a form of confidence in markets and confidence in the ideas that markets were self-correcting. This, in turn, had led to a belief that firms themselves could be left to make fundamentally sensible decisions.”</p>
</blockquote>
<p>In other words, the market — not regulators — would sort out any problems.</p>
<p>In fact, banks behaved abominably, selling <a href="http://www.fsa.gov.uk/static/pubs/other/interest-rate-hedging-products.pdf">dodgy financial products</a> to customers who often did not need the products and more often didn’t understand them. Unlike other goods, such as a motorcar, if a financial product blew up it was the fault of the customer rather than the seller, in the eyes of the bankers. The markets did not regulate misbehaviour because all the banks were all doing it.</p>
<p>Looking back, it was an Alice in Wonderland world where banking was just getting “curiouser and curiouser”.</p>
<p>After all the crises and the injection of billions of dollars of taxpayers’ money, politicians came to the blindingly obvious conclusion that bankers could just not be trusted to do the right thing. Some new regulations were needed to ensure that bankers behaved themselves.</p>
<p>In an example of kicking a dying man when he is down, the UK Parliamentary Commission on <a href="http://www.parliament.uk/bankingstandards">Banking Standards</a> has just issued a <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/144/144.pdf">report</a> into the failure of Halifax Bank of Scotland (HBOS), entitled “An accident waiting to happen”.</p>
<p>This report not only roasts the Board and management of HBOS, but also crucifies the already dead FSA. “The picture that emerges is that the FSA’s regulation of HBOS was thoroughly inadequate [and] from 2004 until the latter part of 2007 the FSA was not so much the dog that did not bark as a dog barking up the wrong tree”.</p>
<p>The committees’ overall comment on the management of HBOS was that the bank was a ‘Manual for Bad Banking’ and that the bank’s culture “was brash, underpinned by a belief that the growing market share was due to a special set of skills which HBOS possessed and which its competitors lacked. The effects of the culture were all the more corrosive when coupled with a lack of corporate self-knowledge at the top of the organisation, enabling the bank’s leaders to persist in the belief, in some cases to this day, that HBOS was a conservative institution when in fact it was the very opposite”.</p>
<p>However, the FSA was not wholly to blame, as the committee admitted that “the experience of the regulation of HBOS demonstrates the fundamental weakness in the regulatory approach prior to the financial crisis and as that crisis unfolded”.</p>
<p>It is not only politicians and regulators that have to come to this conclusion. Last week, an independent <a href="https://www.salzreview.co.uk/web/guest">review</a> of Barclays’ business practices, headed by noted lawyer Anthony Salz, was published. The review, initiated by Barclays, discovered a plethora of bad practices in the recently repentant bank, from misselling of financial products to retail and business customers, rigging LIBOR, misreporting of assets, tax avoidance and more.</p>
<p>Mr Salz concluded: “Pay contributed significantly to a sense among a few that they were somehow unaffected by the ordinary rules. A few investment bankers seemed to lose a sense of proportion and humility.”</p>
<p>So how should such blatant misconduct and incompetence be regulated in future?</p>
<p>Since it was obvious that the FSA was too big and unwieldy already, the solution taken by the UK government was to split regulation across two major organisations.</p>
<p>In the new structure, prudential regulation was hived off to the Prudential Regulatory Authority (PRA) and, in an illustration that governments never learn the lessons of history, this body was handed back to the Bank of England, now rehabilitated after the Barings fiasco.</p>
<p>The second major regulator is new. It is the Financial Conduct Authority (FCA), whose remit is to “promote innovation and healthy competition between financial services firms. We help them keep to the rules and maintain high conduct standards”. This new regulator will be headed by none other than <a href="http://cdn.hm-treasury.gov.uk/wheatley_review_libor_finalreport_280912.pdf">Martin Wheatlev</a> who headed the LIBOR inquiry, so he is well aware of how big the task is going to be.</p>
<p>Of course, in regulation, one can never have enough acronyms and to oversee these two new regulators there is yet another regulator, the FPC (or Financial Policy Committee) which is to be part of the Bank of England. In other words: BOE 2, FSA 0.</p>
<p>Just to complete the carve up of the FSA, the small part of the old regulator that dealt with financial education has been split off as the separate Money Advice Service (MAS) whose remit is to “help people make the most of their money, we give free, unbiased money advice to everyone across the UK – online, over the phone and face to face”. It should be noted that in the USA, a similar independent body, the Consumer Financial Protection Bureau (<a href="http://www.consumerfinance.gov/">CFPB</a>), was set up under the elephantine <a href="http://www.pwc.com/us/en/financial-services/regulatory-services/publications/dodd-frank-closer-look.jhtml">Dodd Frank Act</a>.</p>
<p>In this new regulatory world, UK and US banks need to be better corporate citizens and take the advice of Alice in Wonderland: “I can’t go back to yesterday because I was a different person then”. But until banks become “different persons: they will need robust regulation of their conduct, and hopefully they will get it.</p>
<p>There are lessons for Australia’s banking regulators, too. In the HBOS report, the parliamentary committee makes several comments on the disastrous lending policies of the bank, singling out Australia, where some 28% of business loans were eventually impaired.</p>
<p>It should be remembered that the Australian Prudential Regulation Authority (APRA) was the regulator for Bankwest (the local subsidiary), while "HBOS followed an ambitious growth strategy in Ireland and Australia, involving over-optimistic targets and assumptions for market share growth from local competitors”.</p>
<p>Surely such a risky strategy should have raised eyebrows at APRA headquarters? Not least when Bankwest was later acquired by Commonwealth Bank, albeit at a knockdown price and, as it later turned out, <a href="http://www.smh.com.au/action/printArticle?id=1772627">massive losses</a>.</p>
<p>The issue of the now Australian-owned Bankwest and its treatment of local borrowers was vociferously raised during last year’s <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=economics_ctte/post_gfc_banking/hearings/index.htm">Senate Inquiry</a> into the Australian banking system. Following the many allegations raised, not only on Bankwest, the final recommendation of the Senate Committee was that, “an independent and well-resourced root and branch inquiry into the Australian financial system be established”.</p>
<p>Where is that inquiry?</p><img src="https://counter.theconversation.com/content/13291/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If the UK Financial Services Authority (FSA) had been a dog, it would have been about 86 years old when it was put down on April Fool’s Day this year. Uncharitably, some say that the FSA, the lead regulator…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/131362013-04-02T19:36:23Z2013-04-02T19:36:23ZIs there egg on the RBA's face?<figure><img src="https://images.theconversation.com/files/21933/original/rj6h5994-1364863391.jpg?ixlib=rb-1.1.0&amp;rect=102%2C36%2C3795%2C1855&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">An about-face by the Australian Financial Markets Association on the way our bank bill swap rate is calculated comes as the US mortgage giant Freddie Mac filed a lawsuit alleging unlawful conduct by a number of investment banks.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Last week, the Australian Financial Markets Association (AFMA), the investment bankers’ trade union, announced that it was <a href="http://www.afma.com.au/afmawr/_assets/main/lib90006/bbsw%20update.pdf">changing the way</a> that it calculated the Bank Bill Swap rate (BBSW), the Australian equivalent of LIBOR. </p>
<p>After years of claiming that abuses of this key interest rate benchmark <a href="http://www.theaustralian.com.au/business/financial-services/barclays-debacle-couldnt-happen-here/story-fn91wd6x-1226418318662">couldn’t possibly happen here</a> AFMA has done a complete about-face on the BBSW mechanism. In future, rather than a “panel” of banks estimating BBSW rates, the rates will be extracted “directly from trading venues (brokers and electronic markets)”.</p>
<p>In an Orwellian justification, AFMA portrayed the “enhancement” as an advantage that “will remove the need for a BBSW Panel, which will eliminate the associated compliance and ancillary costs which otherwise exist for panellist banks”. </p>
<p>This 180 degree spin is not only a blow to AFMA (but they have a very thick skin) it is also a slap in the face for the RBA. </p>
<p>Last year, during the <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommsen%2F07d70f88-756c-46e2-8ff6-1624a6351d53%2F0005%22">parliamentary enquiry</a> into the effects of the global financial crisis on the Australian banking sector, Guy Debelle, RBA Assistant Governor for Financial Markets, was asked about the <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6289-12">LIBOR scandal</a> then breaking in Europe. Debelle was circumspect but nonetheless took the party line: </p>
<blockquote>
<p>“I do not think there are any direct implications from what is happening at LIBOR to here. I am sure there are some people who are affected by it but it is not something that has a lot of large direct implications.”</p>
</blockquote>
<p>A few months later, it transpired <a href="https://theconversation.com/dont-believe-the-hype-our-own-libor-scandal-could-be-in-the-wings-12652">UBS</a> had, in fact, tried to manipulate BBSW, although we wait to see the extent (if any) of such manipulation.</p>
<p>With the announcement of the sharp about turn by AFMA, Debelle and the RBA may have to wipe more than the weekend’s chocolate Easter eggs off their collective faces.</p>
<p>First, why is BBSW important?</p>
<p>The numbers are huge and definitely warrant the attention of the RBA. <a href="http://washpost.bloomberg.com/Story?docId=1376-MKAKIL6KLVRM01-36E8SOBDQG5KGCQ05RB2SOCI78">Bloomberg</a> has estimated
at least “A$350 billion of Australian syndicated loans and floating-rate bonds are priced off BBSW”, [and] trading of swaps, forward rate agreements and options tied to BBSW are worth more than A$8.7 trillion in the 2009 financial year.</p>
<p>It was manipulation to produce profits from interest rate derivatives, not loans, which caused the LIBOR scandal at major banks, including UBS and <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6510-13">RBS</a>.</p>
<p>Second, why is this about-face happening now?</p>
<p>Just last week, the US Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, filed a <a href="http://www.bloomberg.com/news/2013-03-19/freddie-mac-sues-multiple-banks-over-libor-manipulation.html">lawsuit</a> in US District Court, which named 29 major financial institutions, including Citigroup, JP Morgan, RBS, Credit Suisse and others, as defendants in what may turn out to be a multi-billion dollar settlement. Freddie Mac is claiming unspecified damages for losses it sustained as a result of the banks’ “unlawful conduct”.</p>
<p>Interestingly, the British Bankers’ Association (BBA), which operated LIBOR - in the same way that AFMA runs BBSW - was also named as a defendant in Freddie Mac’s action. The alarm bells must have rung really loudly at AFMA at the prospect (however remote) of being named as a defendant in a criminal lawsuit.</p>
<p>Alarm bells have also been ringing at the big banks as they too <a href="http://www.bloomberg.com/news/2013-03-27/australia-plans-to-shut-bank-rate-panel-as-hsbc-citigroup-exit.html">have been abandoning the sinking ship</a>, because of concerns for potential criminal liability.</p>
<p>So what has AFMA proposed?</p>
<p>We don’t know the details yet but it is suggested that will BBSW will be “calculated directly using prices from brokers and electronic markets instead of asking a panel of banks”.</p>
<p>Sound reasonable, but the devil is in the detail. A similar suggestion was considered by the official <a href="http://cdn.hm-treasury.gov.uk/wheatley_review_libor_finalreport_280912.pdf">Wheatley</a> inquiry into manipulation of LIBOR but was dismissed as unsatisfactory. </p>
<p>“A transaction data approach is not immune to manipulation. Particularly in a low volume environment, only a small number of transactions at off-market rates would be sufficient to move the final rate fixing. Manipulation of this type may be harder to monitor as it could be attempted by both internal and external parties”</p>
<p>But there is a much deeper question?</p>
<p>Why should AFMA, which after all is a trade association, be involved in operating what is an essential piece of financial infrastructure?</p>
<p>The problem is not so much the technical mechanism for calculating a particular benchmark, but running the process for monitoring the calculation of the benchmark and taking action when manipulation occurs. Neither BBA nor AFMA would appear to be sufficiently independent to eliminate the conflicts of interest inherent in being both operators and major users of their respective benchmarks.</p>
<p>For that reason, Martin Wheatley, the new head of the <a href="http://www.guardian.co.uk/business/2013/mar/21/financial-conduct-authority-raising-fines-will-not-change">UK Financial Conduct Authority</a> (FCA), has recommended that operation of LIBOR be taken away from the BBA and delegated to a new independent organisation. He also proposed that manipulation of any financial benchmark be made a criminal offence.</p>
<p>Even the Basel Committee, the Central Bank regulator, has woken up and just last month issued a <a href="http://www.bis.org/press/p130318a.htm">report</a>, which was, for it, untypically assertive
“Central banks should continue to support the development of well-functioning money markets, in line with their primary policy objectives. This includes close monitoring of developments and structural changes in the relevant markets, and constructive interaction with market participants on an ongoing basis”. In other words - do something!</p>
<p>The question is not what AFMA should do next? The question is what should ASIC, as market regulator, do next?</p>
<p>ASIC chairman Greg Medcraft should immediately initiate an inquiry into what the new mechanism for setting the key Australian interest rate benchmark should be (now that everyone is agreed that a new mechanism is needed). </p>
<p>He should also request AFMA, as a market operator, to develop plans to cater for any risk of this critical rate mechanism failing if more panel banks were to defect.</p><img src="https://counter.theconversation.com/content/13136/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Last week, the Australian Financial Markets Association (AFMA), the investment bankers’ trade union, announced that it was changing the way that it calculated the Bank Bill Swap rate (BBSW), the Australian…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/131682013-04-02T19:32:42Z2013-04-02T19:32:42ZA delayed reckoning: the US Federal District Court and LIBOR<figure><img src="https://images.theconversation.com/files/21935/original/2nqrdbmk-1364864659.jpg?ixlib=rb-1.1.0&amp;rect=84%2C672%2C5439%2C2412&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">A &quot;substantial portion&quot; of claims in private lawsuits against the banks involved in the LIBOR scandal have been dismissed by the US Federal District Court.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>The major banks implicated in the London Interbank Offered Rate (LIBOR) manipulation scandal received a major boost in their ongoing litigation strategies with the <a href="http://www.bloomberg.com/news/2013-03-29/banks-win-dismissal-of-substantial-portion-of-libor-sui.html">dismissal of large components of a consolidated antitrust claim</a> in the Federal District Court in Manhattan last week. The judgement sought to delineate the parameters of the public and private enforcement in litigation that the former Assistant Attorney-General, Lanny Breuer, has maintained has the capacity to morph into the biggest white-collar crime in history. </p>
<p>“We recognise that it might be unexpected that we are dismissing a substantial portion of plaintiffs’ claims, given that several of the defendants here have already paid penalties to government regulatory agencies reaching into the billions of dollars. However, these results are not as incongruous as they might seem,” Judge Naomi Reice Buchwald held in a wide-ranging 161-page judgement.</p>
<p>While noting the seriousness of the LIBOR misconduct exposed in the regulatory settlements, Judge Buchwald expressed extreme scepticism about both the nature of the private claims and the manner in which they have been pleaded. In so doing, her ruling reflects profound concern about the potential misuse of the class action rather than commentary on the liability banks face in ongoing civil and criminal public enforcement. </p>
<p>In contrast to the careful approach of the Department of Justice, which has based its litigation strategy on misrepresentation, the class action privileged violation of state and federal antitrust law. This approach provides for punitive damages. In addition, one set of claims alleged that collusion in setting artificial submissions violated the <a href="http://www.fbi.gov/about-us/investigate/organizedcrime/glossary">Racketeer Influenced and Corrupt Organisations</a> (RICO) statute. Invoking RICO had equally obvious attractions for the class action lawyers, notwithstanding significant legal limitations in application. Given the fact that the activity occurred in London and was, therefore, outside of the reach of US law. It was, however, according to Judge Buchwald, “a claim whose siren song of treble damages apparently proved irresistible.” Unstated but inferred was that a similar dynamic informed the application of state and federal antitrust law.</p>
<p>The Court held that to prove violation of the antitrust provisions of the <a href="http://www.justice.gov/atr/public/divisionmanual/chapter2.pdf">Sherman Act</a> (and its state level facsimile, California’s Cartwright Act), “a plaintiff must demonstrate not only that it suffered injury and that the injury resulted from defendants’ conduct, but also that the injury resulted from the anticompetitive nature of defendant’s conduct”. Judge Buchwald found, however, that “the process of setting LIBOR was never intended to be competitive. Rather, it was a cooperative endeavour to facilitate the creation of a benchmark”. Thus, “even if we were to credit plainiffs’ allegations that defendants subverted this cooperative process by conspiring to submit artificial estimates instead of estimates made in good faith, it would not follow that plaintiffs have suffered antitrust injury. Plaintiffs’ injury would have resulted from defendants’ misrepresentation, not from harm to competition,” she held. “The plaintiff’s theory is that defendants competed normally in the interbank loan market and then agreed to lie about the interest rates they were paying in that market when they were called upon to truthfully report their expected borrowing costs to the <a href="http://www.bba.org.uk/">BBA</a>. This theory is one of misrepresentation, and possibly of fraud, but not of failure to compete.”</p>
<p>A second set of problematic claims focused on violation of the <a href="http://www.cftc.gov/lawregulation/commodityexchangeact/index.htm">Commodity Exchange Act</a> of 2006. Here to succeed the plaintiffs had to satisfy two key tests. First, given the fact that the LIBOR setting occurred in London, it again had to survive the defendants competing claim that such a course of action violated the territorial limits of US law. While Judge Buchwald found that the CEA does not apply internationally, a cause for action could be sustained if the conduct impugned the integrity of domestic commodity markets. Thus, “because plaintiffs’ claims involve manipulation of the price of domestically traded futures contracts, they are not impermissibly extraterritorial”. Moreover, the grounds to proceed are provided precisely because “LIBOR was directly incorporated into the price of Eurodollar futures contracts, and by allegedly manipulating LIBOR, defendants manipulated the price of those contracts … In short, plaintiffs’ claims clearly involve manipulation of the price of Eurodollar futures contracts, and manipulating the price of futures contracts traded on domestic exchanges is precisely the conduct that the CEA was designed to regulate. Accordingly, plaintiffs’ claims fall within the purview of the CEA.”</p>
<p>Judge Buchwald cautioned that to succeed, the complained of conduct had to take place within the timeframe provided by the act. The Federal Court found “that certain of plaintiffs’ claims are barred, certain are not, and others may or may not be, though we will not dismiss them at this stage”. The judge pointed to the fact that as early as 2008, prominent media outlets including the Wall Street Journal, Bloomberg and the Financial Times had reported that LIBOR was operating at artificial levels. Such detailed reportage “put plaintiffs on inquiry notice of their claims based on Eurodollar futures contracts purchased during that period”. She found “unconvincing” the argument that the notice period should begin from the date UBS provided formal notice in its annual report in 2011 that it was under formal investigation.</p>
<p>According to Judge Buchwald, “although it is accurate that none of the [2008] articles definitively established that LIBOR was being manipulated, they did not need to do so to place plaintiffs on inquiry notice. Rather, they needed only to suggest to a person of ordinary intelligence the probability that LIBOR had been manipulated. Accepting as true plaintiffs’ allegations that they were injured by paying too high a price for Eurodollar futures contracts and that the price at which Eurodollar contracts trade is affected by existing LIBOR fixes, it follows that if plaintiffs were on notice that LIBOR had been set at artificial levels, they were also on notice of their injury”.</p>
<p>Judge Buchwald also placed significant limitations on the use of future material that may reach the public domain as a consequence of ongoing public enforcement. “We are inclined to think that the articles discussed above placed plaintiffs on inquiry notice of their injury based on any sort of LIBOR manipulation,” she ruled.</p>
<p>The most damning aspect of the ruling, however, focused on the deployment of the RICO statute. This may have made for good headlines and help in settlement negotiations but for Judge Buchwald would never satisfy a court as legitimate. Two reasons were advanced. First, “all of defendants’ misrepresentations to the BBA would likely be grounds for a securities fraud claim by the SEC, which would be sufficient for plaintiffs’ RICO claim to be barred under the Private Securities Litigation Reform Act’s (PSLRA) RICO Amendment”. Secondly, as noted above, according to the District Court ruling the “plaintiffs’ RICO claim rests on an impermissible extraterritorial application of the RICO statute. This provides an independent basis for dismissing plaintiffs’ RICO claim”.</p>
<p>Judge Buchwald has done us all a service in delineating the legal landscape. Its effect is to transfer primary leadership back to regulatory authorities and the Department of Justice. The question is whether public enforcement will impose sufficient additional non-financial penalties in settlement negotiations to ensure practice changes in the City of London and New York, given the absence of multibillion dollar class action settlements. It would indeed be a tragedy if yet another opportunity by regulators to institutionalise restraint was wasted. As Judge Buchwald has made clear, they are the only ones with the authority and legitimacy to do so. </p>
<p><em>Justin O'Brien writes a column for The Conversation, The ethical deal, and is director of the <a href="http://www.clmr.unsw.edu.au/">UNSW Centre for Law, Markets and Regulation portal</a>, where this story also appears.</em></p><img src="https://counter.theconversation.com/content/13168/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin O&#39;Brien receives funding from the Australian Research Council for three grants related to corporate governance, financial regulation and accountable governance. This opinion is simultaneously published on an online portal that maps and tracks regulatory reform in the aftermath of the GFC - <a href="http://www.clmr.unsw.edu.au">www.clmr.unsw.edu.au</a>.
</span></em></p>The major banks implicated in the London Interbank Offered Rate (LIBOR) manipulation scandal received a major boost in their ongoing litigation strategies with the dismissal of large components of a consolidated…Justin O'Brien, Professor of Law, UNSWLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/126522013-03-07T03:09:22Z2013-03-07T03:09:22ZDon't believe the hype; our own LIBOR scandal could be in the wings<figure><img src="https://images.theconversation.com/files/21006/original/wcj4rs3c-1362545517.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Under fire for manipulating the LIBOR rate, investment Bank UBS also tried to manipulate Australia&#39;s local bill swap rate, say US regulators.</span> </figcaption></figure><p>Many months after the event, the Australian financial press has woken up to the fact that there was a financial scandal happening elsewhere. Worse still, it may also have happened here. The tabloid-like <a href="http://www.abc.net.au/news/2013-03-05/ubs-cheats-target-key-australian-interest-rate/4553564">headline</a> indicates the outrage: “UBS cheats target key Australian interest rate”.</p>
<p>The LIBOR (the London Inter Bank Offering Rate) scandal has been going on for a number of years, winding its way through multiple investigations, sackings and fines in the US, UK and Switzerland, culminating in the last few months in massive fines to <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6289-12">Barclays</a>, <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6472-12">UBS</a> and <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6510-13">RBS</a>. And there is more to come.</p>
<p>The allegations that UBS attempted to game Australia’s local rate, the Bank Bill Swap rate (BBSW), came to light this week through the release of minutes of proceedings by the Commodities Futures Trading Commission which mentioned an internal UBS inquiry.</p>
<p>With <a href="http://www.afr.com/p/business/companies/ubs_traders_tried_to_game_australian_0Bbkz7A5PfZvHJQpe3UytK">some notable exceptions</a>, the Australian financial press has generally stayed aloof and generally supercilious when the LIBOR scandal is mentioned because they had been told that all was well with the BBSW.</p>
<p>Who told them that? Of course, the very people responsible for collecting and disseminating the BBSW rate, the Australian Financial Markets Association (AFMA), or the investment bankers’ trade union.</p>
<p>Until recently the British Bankers’ Association (BBA) had said exactly the same things about <a href="http://www.bbalibor.com/bbalibor-explained">LIBOR</a> and were so wrong. As a consequence, the official <a href="http://cdn.hm-treasury.gov.uk/wheatley_review_libor_finalreport_280912.pdf">Wheatley</a> inquiry into the fiddling of LIBOR rate(s) has recommended taking the publication of benchmark rates away from the BBA and giving the management to a new independent arms-length body.</p>
<p>Now AFMA are correct in claiming that there are structural differences between the calculation of LIBOR and the Australian BBSW, most importantly in that BBSW rates should be based on actual as opposed to estimated rates. Certainly those differences make rigging the rates more difficult - but not impossible.</p>
<p>The BBSW <a href="http://www.afma.com.au/afmawr/_assets/main/lib90031/bank%20bill%20swap%20%28bbsw%29%20reference%20rate%20procedures.pdf">calculation process</a> is similar to that of LIBOR. Each of 14 banks (the major Australian banks plus the usual suspects, UBS, RBS Citigroup, JPMorgan etc.) may enter rates for up to 6 maturities (1 to 6 months out). For each maturity, there is then a process of ‘topping and tailing’ whereby highest or lowest rates are removed until a maximum of six rates remain and then the average taken as the official rate.</p>
<p>As with LIBOR, the BBSW calculation process is designed so that no one contributor of rates can precisely fix the final rate.</p>
<p>But can banks influence rates and why would they want to do so?</p>
<p>It doesn’t take a genius to work out that by deliberately entering a high rate, the average is likely to be (but not certainly) higher than it would have been if a lower rate were entered, due to removing of outliers.</p>
<p>Why would banks try to influence BBSW (or LIBOR) rates upwards or downwards? Simply, because it is in their interest to do so.</p>
<p>The key influence in the LIBOR Scandal is the enormous growth of the global Interest Rate Swaps (IRS) market, which has contracts outstanding in the order of some $300 trillion (yes trillion) of so-called “notional amount”. </p>
<p>Interest Rate traders often have billions of dollars of Fixed/Floating swaps due to “reset” each week. If they can push the markets rates in a certain direction for those contracts, then they can profit when the rates are re-set.</p>
<p>This is precisely what happened with LIBOR. Traders attempted to influence rates when they had re-sets on their IRS positions.</p>
<p>How could traders ensure that they could influence the rates?</p>
<p>The inquiries into the manipulation of LIBOR by Barclays, UBS and RBS all show that, by using so-called “wash trades”, traders were able to compensate brokers for helping them to influence submissions at other banks. The fact that the trading community is so small means that everyone knows everyone else and has probably worked with, or for, their counterparts at other banks at some time in their career. Scratching backs becomes part of the game.</p>
<p>How did the traders get away with it?</p>
<p>The inquiry into UBS by the CFTC says it all “reviews conducted by both Compliance and Group Internal Audit did not notice the misconduct”. Why? Because no one was looking for it. Everyone had become complacent, believing the BBA hype that the calculation could not be gamed.</p>
<p>The final word of warning should come from Johnny Cameron, former Chairman of Global Banking and Markets RBS Group, in testimony to the UK Parliamentary Commission on <a href="http://www.parliament.uk/bankingstandards">Banking Standards</a>. </p>
<p>Mr Cameron who had been in charge of those involved in the LIBOR scandal at RBS, was asked, “You must surely have known, then, what was going on and what their culture was, at its most general?” He replied: </p>
<blockquote>
<p>“No. That is why traders need very tight, close management… Risk managers, control managers and so on and so forth completely missed the point, because everybody thought that the way LIBOR was fixed was that there are however many banks it is and the bottom quartile and the top quartile are excluded.”</p>
</blockquote>
<p>The Australian financial press should not fall into the same trap. There may be (and hopefully is) nothing wrong with the process of setting BBSW rates but if there has been manipulation then there will be lots of eggs on lots of faces.</p><img src="https://counter.theconversation.com/content/12652/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Many months after the event, the Australian financial press has woken up to the fact that there was a financial scandal happening elsewhere. Worse still, it may also have happened here. The tabloid-like…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/122932013-02-20T19:37:26Z2013-02-20T19:37:26ZIn the Tour de Finance, who will be the Lance Armstrong of the financial markets?<figure><img src="https://images.theconversation.com/files/20397/original/kgzxp92f-1361249394.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">RBS joins the list of banks implicated in the ever-widening LIBOR scandal.</span> <span class="attribution"><span class="source">Flickr\ell brown</span></span></figcaption></figure><p>In his recent interview with Oprah Winfrey, Lance Armstrong belatedly admitted to taking illicit drugs throughout his career. But in doing so, he also shed light on a corrupt culture within the sport involving colleagues, sponsors and even the governing body of cycling. Drug taking was such an integral part of the sport that, because the sport was gaining in popularity, nobody wanted to rock the boat. Everyone was benefiting from the deceit.</p>
<p>Last week, the Commodity Futures Trading Commission (CFTC) handed down a <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6510-13">damning report</a> on the Royal Bank of Scotland (RBS) and its part in the ever-widening LIBOR scandal, which has already engulfed <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6289-12">Barclays</a>, <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6472-12">UBS</a> and is about to <a href="http://theconversation.com/watching-the-dominos-fall-in-the-libor-crisis-11358">touch others</a>.</p>
<p>The RBS report is shocking because it details blatant examples of market manipulation, widespread collusion, and anti-competitive, cartel-like behaviour. The conversations between bankers and brokers in multiple firms to manipulate LIBOR are laid out in shocking snippets of expletive-laden market jargon and workplace bonhomie. Transcripts record the fact that traders knew that they were doing wrong; they just didn’t think that they would be caught. They, like Armstrong, thought were above the law.</p>
<p>But RBS is not unique. The same brazen tactics used to extract unwarranted profits from manipulating the markets were reported at UBS and Barclays. Nor was it just the banks: the exploitation also involved brokers, who were bribed by under-the-counter payments to rig the largest financial market in the world to the detriment of their clients.</p>
<p>It was not just the frontline troops. The reports into Barclays and UBS detail instances where the most senior management of these companies were actively involved in manipulating the market to protect their jobs. The CFTC inquiries also document massive failures of compliance functions within all of these banks; <a href="http://www.investopedia.com/terms/c/chinesewall.asp">Chinese Walls</a> were burned down in the dash for instant profits.</p>
<p>When the reports are put together — and doubtless amplified by more to come — a picture of corruption emerges across the industry. Manipulation of the $300 trillion interest rate market had become so commonplace that it had become part of doing business. Specialists moved between firms keeping their networks alive by sending over crates of champagne to one another when backs had been scratched. The LIBOR trough was so enormous that there was enough for every pig to gorge themselves silly.</p>
<p>How long had this deceit been going on? Technology has allowed investigators to find instances dating back to 2005, in the super-heated markets before the GFC. But one <a href="http://www.ft.com/cms/s/0/dc5f49c2-d67b-11e1-ba60-00144feabdc0.html">ex-trader</a> reports that, as a new trader the early 1990s, his colleagues considered him amazingly naive when he reported what he considered to be manipulation.</p>
<p>At this point, one might ask: what were regulators doing? There were a number of studies, by normally astute bodies such as the <a href="http://www.imf.org/external/pubs/ft/gfsr/2008/02/pdf/text.pdf">IMF</a>, which concluded that while manipulation was alleged it could not be proven. These regulators were not duped. It transpires that manipulation was so widespread it was no longer anomalous, but was part of the background noise of the market. When there is collusion to rig market prices, who can say what the real market price should be? Certainly not post-hoc statistical analysis.</p>
<p>In itself, the widespread corruption in the global interest rate markets would be sufficient to warrant a serious re-think of banking regulation. But in the past few years, major banks have also been accused and found guilty of <a href="http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211">money laundering</a> (HSBC and Standard Chartered), <a href="http://www.washingtonpost.com/wp-dyn/content/article/2010/07/15/AR2010071505111.html">securities fraud</a> (Goldman), <a href="http://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">tax avoidance</a> (Australian banks) and <a href="http://www.guardian.co.uk/business/2012/nov/01/lloyds-ppi-mis-selling-5bn">deceptive practices</a> (UK banks) in multiple markets. There is a stench of corruption in the global financial markets that will not be removed except by root-and-branch reform.</p>
<p>Who should tackle this mammoth task?</p>
<p>Certainly not the global banking regulator, the Bank for International Settlements (BIS), which has been <a href="http://theconversation.com/is-the-basel-process-broken-you-can-bank-on-it-11488">captured</a> by the largest banks. Self-regulation doesn’t work either, as shown by the failure of the British Bankers Association (BBA) to police its own rules on LIBOR. Local regulators are finding it hard to chase companies beyond their parochial jurisdictions. The largest banks are adept at routing dodgy transactions through so-called Special Purpose Vehicles, located in offshore banking centres such as Ireland, to evade local scrutiny.</p>
<p>Is there a better model?</p>
<p>We can look to sport for an example. The World Anti-Doping Agency (<a href="http://www.wada-ama.org/en/About-WADA/">WADA</a>), headed by Australian John Fahey (a modern day Elliot Ness if ever there was one), has created a regime that means that while an offender may not be caught today, information is painstakingly collected that can be analysed later to detect drug-taking. It is CSI applied to sport. This system eventually led to the confessions that finally brought Lance Armstrong down.</p>
<p>In their next meeting, the G20 should create a World Financial Crimes Agency (WFCA), based loosely on the WADA model. The role of such an agency would be to collect data from financial markets around the world and to test for possible financial crimes. Such an agency would actively encourage whistle blowing and prod legislators to provide protection for whistle-blowers. The body would also ensure that bank boards, like sporting administrators, sign up to a campaign to drive white-collar crime out of the financial industry.</p>
<p>The costs would be a pittance compared to the economic damage inflicted by market manipulation and might start to restore public faith in the financial markets.</p>
<p>There is a possible candidate for the Armstrong role. His name is Thomas Hayes, who has been <a href="http://www.telegraph.co.uk/finance/libor-scandal/9737068/Three-arrested-in-SFO-Libor-rigging-investigation.html">outed</a> by the press as the probable ‘Senior Yen Trader’ at UBS. This senior banker was a Svengali who successfully orchestrated “campaigns” to manipulate the LIBOR markets. Mr Hayes, if he is indeed the infamous Senior Yen Trader, will never work in the financial markets again and hence should be encouraged to come clean about the deception in return for some form of protection. Perhaps a segment on Oprah awaits.</p><img src="https://counter.theconversation.com/content/12293/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In his recent interview with Oprah Winfrey, Lance Armstrong belatedly admitted to taking illicit drugs throughout his career. But in doing so, he also shed light on a corrupt culture within the sport involving…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/120892013-02-08T02:45:26Z2013-02-08T02:45:26ZThe long tail of the LIBOR scandal: RBS settlement opens the gate to civil penalties<figure><img src="https://images.theconversation.com/files/20048/original/rxspxdc7-1360282084.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Failures of compliance and culture have been attributed to the RBS&#39; misconduct in the LIBOR manipulation scandal.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The fallout from the London Interbank Offered Rate (LIBOR) scandal continues apace with the announcement on Wednesday that the Royal Bank of Scotland (RBS) had reached a <a href="http://www.reuters.com/article/2013/02/06/us-rbs-libor-idUSBRE91500B20130206">$US612 million settlement </a>with the UK’s Financial Services Authority, the US Commodity Futures Trading Commission, and the US Department of Justice, regarding accusations it had manipulated LIBOR.</p>
<p>Like the settlements with Barclays and UBS that have preceded it, the misconduct at RBS is linked to a failure of compliance and culture. The <a href="http://www.justice.gov/iso/opa/resources/28201326133127414481.pdf">deferred prosecution agreement</a> (DPA) notes that not only did RBS lack a compliance program sufficient to detect and prevent such conduct, but it placed derivatives traders and submitters together at the same desk, magnifying potential conflicts of interest. Even when separated, the <a href="http://ftalphaville.ft.com/2012/06/27/1062301/libor-manipulation-done-for-you-big-boy/">misconduct continued</a> through an internal instant messaging system. Extracts of instant messages between traders suggest that manipulation of LIBOR was both encouraged and tolerated by at least junior level managers within the bank, with a former employee bringing an action in Singapore for wrongful dismissal on the basis that the bank condoned the manipulation.</p>
<p>Despite the magnitude of the fine, the market reacted favourably to the announcement, with shares in RBS rising 1.3% upon the announcement. There are a number of possible explanations. First, the RBS’ misconduct was relatively low in contrast to Barclays and UBS. RBS traders were attempting to manipulate the rate for personal gain, in contrast to Barclays, where senior management tried to make the bank look healthier during the 2008 financial crisis. Second, RBS is 82%-owned by the British government. Bailed out with the <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4291807/Banking-bailout-The-rise-and-fall-of-RBS.html">largest-ever rescue effort in 2008</a>, any significant fine imposed by the regulators would be punishing the British taxpayer. As a pre-emptive measure, the RBS has confirmed that the financial impact of the settlement will be cushioned through recouping £300 million from a reduction in pay and bonuses of approximately 1,500 senior staff in its global markets division. Third, the fine fell short of expectations.</p>
<p>Any sense of closure in relation to RBS should be cautioned, as the regulatory fine is likely to dwarf any civil penalties. According to the DPA, RBS made hundreds of attempts between 2006 and 2010 to manipulate the Yen and Swiss Franc LIBOR rates and made false LIBOR submissions, with a dozen of the bank’s employees involved in the trades. “It’s just amazing how LIBOR fixing can make you that much money … it’s a cartel now in London” <a href="http://www.independent.co.uk/news/business/news/its-just-amazing-how-libor-fixing-can-make-you-that-much-money-traders-gleefully-admitted-rate-fixing-was-cartel-8483505.html">wrote one RBS Yen LIBOR trader in an instant message</a> in August 2007. The DPA states that a series of electronic transactions links RBS traders to those at other banks, particularly Swiss bank UBS AG. UBS has <a href="http://uk.reuters.com/article/2012/12/19/uk-ubs-libor-idUKBRE8BI00L20121219">already been fined</a> $US1.5 billion and two of its traders have been charged by US regulators in connection with the scandal. This third settlement leaves little doubt that the collusion among banks and between banks and money market brokers is both widespread and systemic.</p>
<p>Following the initial Barclays settlement, numerous lawsuits have been filed against some of the world’s largest banks in connection with their alleged manipulation of LIBOR. Many of these cases are class action suits brought on behalf of a diverse group of plaintiffs including investment managers, lending institutions, derivatives users, brokerage firms and municipalities. Besides alleging that LIBOR-submitting banks artificially suppressed the published LIBOR indications and caused plaintiffs to earn a lower rate of interest on investments, some plaintiffs have also claimed that the banks conspired to suppress LIBOR.</p>
<p>Evidence of collusion between banks will be a crucial factor in determining the outcome of class action lawsuits. Given LIBOR’s centrality to interest rates on mortgages, credit cards, student loans, and other consumer financial products, the list of potential plaintiffs is potentially endless. Further, at least a dozen other banks, including Citigroup, JPMorgan Chase, Bank of America and HSBC face similar investigations. While the regulatory actions are settled, the civil cost of stacking the deck is, as yet, unknown.</p><img src="https://counter.theconversation.com/content/12089/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Olivia Dixon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fallout from the London Interbank Offered Rate (LIBOR) scandal continues apace with the announcement on Wednesday that the Royal Bank of Scotland (RBS) had reached a $US612 million settlement with…Olivia Dixon, Lecturer, Faculty of Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/114122012-12-27T22:17:20Z2012-12-27T22:17:20Z2012, the year that was: Business and Economy<figure><img src="https://images.theconversation.com/files/18916/original/3cqqwh95-1355889400.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">Re-run: if the US fiscal cliff has the same feel as last year&#39;s debt ceiling crisis, we&#39;re not surprised…</span> </figcaption></figure><p>Different year, same crisis. Around this time last year, the United States was looking down the barrel of economic disaster with the debt ceiling. As we approach 2013, it peers over the fiscal cliff. </p>
<p>That feeling has characterised 2012. Events from 2011 - such as the Eurozone sovereign debt crisis - have continued their relentless rush this year, morphing into other deeper consequences. </p>
<p>While last year entire nations stood on the brink (and continue to), this was the year when citizens bore the brunt of austerity cuts they were told they must endure. </p>
<p>While banks finally now feeling the consequences of activities which took the global economy to the brink, there is a feeling that despite doling out record-breaking fines, regulators seem unable to fully grapple with reforming a global system utterly divorced from the <a href="https://theconversation.com/in-the-libor-scandal-where-were-the-regulators-11300">public good</a>, writes UNSW Professor of Law, Justin O'Brien. </p>
<blockquote>
<p>“The societal cost of the break between stated and lived values exposed in the Libor scandal poses a series of fundamental questions. Can corporate culture be regulated? If so, should it? How does one ensure the continuing accountability of regulatory intervention?”</p>
</blockquote>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" srcset="https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=450&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=450&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=450&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=566&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=566&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/18923/original/3wm775pd-1355891827.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=566&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former Barclays boss Bob Diamond and the LIBOR rigging affair.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>And at home, a reality check: Australia is not immune to the global conditions. </p>
<p>Falling commodities prices and declining tax revenues has already pushed some debt-saddled states to begin deep - and unpopular - cost cutting measures, while the Federal Government has finally abandoned its dogged pursuit of a budget surplus. </p>
<p>These changing times will test the mettle of Australia’s mining barons, <a href="https://theconversation.com/the-floating-fortunes-of-our-iron-ore-barons-9392">wrote Jason West</a>.</p>
<blockquote>
<p>History is replete with entrepreneurs who saw opportunity and invested their personal wealth and reputation at a critical period but failed to adjust when the global economy shifted.</p>
</blockquote>
<p>This year was also the year of a deepening <a href="https://theconversation.com/topics/productivity">productivity debate</a>, further emphasis on <a href="https://theconversation.com/topics/tax">tax reform</a> - including calls for a change to the GST and corporate tax rates - and some hard thinking about our manufacturing industry. </p>
<p>UTS Professor Roy Green, who headed the Prime minister’s Manufacturing Taskforce <a href="https://theconversation.com/the-blueprint-for-a-smarter-australia-starts-with-manufacturing-8900">saw positivity</a>; others took a more hard-headed approach, particularly to the car industry. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" srcset="https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=900&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=900&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=900&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=1131&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=1131&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/18913/original/mckcd5qp-1355888783.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=1131&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Covetous: Gina Rinehart moved on Fairfax.</span>
</figcaption>
</figure>
<p>And it was also the year of mining barons coveting media interests and <a href="https://theconversation.com/death-by-1-900-cuts-will-quality-journalism-thrive-under-fairfaxs-new-model-7734">hard decisions for Australia’s media</a>.</p>
<p>For The Conversation, a pivotal piece by founder Andrew Jaspan, ‘<a href="https://theconversation.com/fairfax-or-gina-fax-lets-have-the-debate-before-its-over-7721">Fairfax or Gina-fax? Let’s have the debate before it’s over</a>’ helped to further cement our presence and kicked off one of our most <a href="https://theconversation.com/topics/future-of-media">important series</a>.</p>
<p>Also grappling with technology advances, Australian retailers could no longer ignore the online revolution that was threatening to leave it behind.</p>
<p>Irrespective of the politics which surround it, Julia Gillard’s misogyny speech, as it’s come to be known, was a game-changer which has galvanised public debate on women in leadership positions.</p>
<p>Readers of The Conversation’s business section will already be familiar with this debate, from new research on <a href="https://theconversation.com/exploring-the-use-of-quotas-for-women-in-leadership-roles-6864">quotas</a>, <a href="https://theconversation.com/its-still-a-long-way-to-the-top-for-australias-working-women-11024">an examination of women on boards and in executive positions</a>, the <a href="https://theconversation.com/when-wages-negotiable-women-readily-make-pay-deals-11033">good news</a> and <a href="https://theconversation.com/a-lose-lose-proposition-whats-really-happening-when-women-negotiate-6215">the bad</a>.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" srcset="https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=450&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=450&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=450&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=566&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=566&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/18915/original/g9p67wr9-1355888984.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=566&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Julia Gillard’s misogyny speech galvanised attention for women in leadership.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>Earlier this year <a href="https://theconversation.com/for-women-to-have-it-all-we-have-to-change-the-way-we-work-8096">Eva Cox</a> responded to a controversial story in The Atlantic magazine by Anne-Marie Slaughter titled 'Why women still can’t have it all’. Economists know that there are always scarce resources, Cox wrote:</p>
<blockquote>
<p>“…but why are women of child bearing age still having to limit their choices? All we ask is that our choices were not constrained by gender, which seems a feasible aim.”</p>
</blockquote>
<p>This year, The Conversation collaborated with the Centre for Applied Microeconomic Analysis (CAMA) to publish the monthly deliberations of its <a href="https://theconversation.com/topics/shadow-reserve-bank">Shadow Board</a>, made up of academic and practising economists, prior to the Reserve Bank of Australia’s board meeting. This is much more than the familiar guessing exercise we see in the media: as ANU Professor Shaun Vahey explains, the study is an “exercise in control, not forecasting”. </p>
<blockquote>
<p>It aims to resolve two outstanding issues: first, can individual Board members quantify their uncertainty about the appropriate target cash rate with probabilities?</p>
<p>Second, can the risks envisaged by individual decision-makers be aggregated to give a collective view about the appropriate cash rate?“</p>
</blockquote>
<p>Finally, it’s always fraught picking favourites but these particularly grabbed us this year:</p>
<p><a href="https://theconversation.com/obamas-fiscal-grand-bargain-is-a-great-betrayal-of-americas-most-vulnerable-11128">Obama’s fiscal ‘grand bargain’ is a great betrayal of America’s most vulnerable</a>: As the fiscal cliff looms, American exceptionalism may have reached its economic limits. This piece is a sharp analysis on how America’s most vulnerable risk being betrayed by a fiscal cliff deal.</p>
<p><a href="https://theconversation.com/video-series-some-sports-economics-8248">VIDEO SERIES: Some Sports Economics</a>: An entertaining series that combines sports and first-year microeconomics.</p>
<p><a href="https://theconversation.com/lets-turn-it-up-to-11-why-audio-quality-loses-out-in-the-loudness-wars-9359">Let’s turn it up to 11: why audio quality loses out in the loudness wars</a> uses Keynesian economics to illustrate market failure in the long-running "loudness wars” between record companies. A cracking read with a counter-intuitive premise: that technology has made sound quality more inferior over time.</p>
<p>Thanks to all our authors for the thought-provoking analysis, opinion and research we have published this year. We believe it has added much-needed depth the debate. And, of course, thanks to all our readers - we’ve had a cracking year. </p>
<hr>
<p><strong>Top five stories of the year:</strong></p>
<p><a href="https://theconversation.com/fairfax-or-gina-fax-lets-have-the-debate-before-its-over-7721">Fairfax or Gina-fax? Let’s have the debate before it’s over</a></p>
<p><a href="https://theconversation.com/malcolm-fraser-does-it-matter-who-owns-our-papers-yes-it-does-7738">Malcolm Fraser: Does it matter who owns our papers? Yes it does</a></p>
<p><a href="https://theconversation.com/killing-the-kodak-moment-is-the-iphone-really-to-blame-4879">Killing the Kodak moment … is the iPhone really to blame?</a> </p>
<p><a href="https://theconversation.com/iron-ore-prices-continue-to-fall-but-is-it-really-time-to-panic-about-china-9339">Iron ore prices continue to fall, but is it really time to panic about China?</a></p>
<p><a href="https://theconversation.com/the-anatomy-of-the-resource-boom-tells-us-its-only-going-to-get-better-for-taxpayers-10314">The anatomy of the resource boom tells us it’s only going to get better for taxpayers</a></p><img src="https://counter.theconversation.com/content/11412/count.gif" alt="The Conversation" width="1" height="1" />
Different year, same crisis. Around this time last year, the United States was looking down the barrel of economic disaster with the debt ceiling. As we approach 2013, it peers over the fiscal cliff. That…Helen Westerman, Business + Economy EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/113582012-12-19T23:24:10Z2012-12-19T23:24:10ZWatching the dominos fall in the LIBOR crisis<figure><img src="https://images.theconversation.com/files/18759/original/rpw72t4t-1355715056.jpg?ixlib=rb-1.1.0&amp;rect=46%2C55%2C3002%2C2210&amp;q=45&amp;auto=format&amp;w=496&amp;fit=clip" /><figcaption><span class="caption">The UK&#39;s LIBOR system was designed to be transparent but difficult to game: so what happened?</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Imagine if we discovered that the monthly setting of the Reserve Bank of Australia’s cash rate was rigged.</p>
<p>There would quite rightly be outrage. We trust the RBA Board to make these calls, month after month, impartially, for the general good of the Australian economy.</p>
<p>Such a breach of trust is precisely what happened in the UK’s LIBOR scandal.</p>
<p>It is now clear that Barclays Bank, which was fined a total of $450 million earlier this year, wasn’t alone. Overnight the news has broken that UBS has been fined $1.5 billion for LIBOR rigging over several years and involving dozens of staff. </p>
<p>Last week, a former Citigroup trader was arrested by police as a result of the scandal and the UK Serious Fraud Office (SFO) has taken charge of investigations. In the same truly terrible week for one of the world’s largest banks, <a href="http://www.ibtimes.co.uk/articles/368151/20120730/hsbc-libor-fixing-scandal-euribor-money-laundering.htm">HSBC</a> (which was hit by a separate $1.9 billion fine for money laundering by US regulators) has set aside millions to cover the costs of the LIBOR scandal. </p>
<p>Elsewhere it has been <a href="http://www.bloomberg.com/news/2012-08-15/jpmorgan-barclays-said-among-banks-to-get-libor-subpoenas.html">reported</a> that JPMorgan, Royal Bank of Scotland have been subpoenaed by US authorities. </p>
<h2>What is LIBOR?</h2>
<p>Like the Official Cash Rate, LIBOR (London Inter-Bank Offer Rate), is not an actual rate at which banks borrow or lend but a “reference” or “benchmark” rate against which borrowing or lending rates are set, often in a form such as LIBOR + 1.5%. LIBOR is meant to represent the borrowing rates between banks in the London Money Markets.</p>
<p>Unlike the RBA cash rate, however, LIBOR is not set by an official body such as the Bank of England, but by the industry itself in a process coordinated by the British Bankers Association (BBA), giving rise to the correct terminology <a href="http://www.bbalibor.com/bbalibor-explained">bbalibor</a>.</p>
<p>There is not one LIBOR rate but 150 different rates, covering 10 currencies (including the Australian dollar) at 15 different “maturities”. Maturity here refers to the period covered by a specific <a href="http://www.global-rates.com/interest-rates/libor/libor.aspx">LIBOR rate</a>, ranging from “overnight” to one week, two weeks, one month, two months and so on up to 12 months. </p>
<p>The genesis of LIBOR can be traced back to the mid-1980s, when trading in so-called Forward Rate Agreements (FRA) started to grow. Interest Rate Derivatives (IRD), such as FRAs, are very powerful tools allowing businesses to “lock in” future interest rates. The rapid growth of this market prompted banks to standardise the rates and terms of these contracts, giving rise to LIBOR as we know it today.</p>
<p>In theory the process is designed to be a relatively transparent process that should be difficult to game.</p>
<p>For a particular currency and maturity LIBOR is set by a “contributing panel” of banks, each of which is asked each day to answer the same question: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”</p>
<p>Their answers, which are confidential, are collated by Thomson Reuters, and averaged (after “trimming” the highest and lowest 25% of contributions) to arrive at the official rate for each maturity, which is then published on the BBA LIBOR market page at 11am each day. (There is a different panel for each currency although the major international banks, such as JP Morgan, appear on many panels).</p>
<h2>Who uses LIBOR?</h2>
<p>While many business loans and even some floating rate mortgages in the UK and USA use LIBOR as the reference rate, the market for Interest Rate Derivatives based on LIBOR is estimated at $300 trillion. (Compare this to the <a href="https://www.google.com.au/publicdata/explore?ds=d5bncppjof8f9_&amp;met_y=ny_gdp_mktp_cd&amp;tdim=true&amp;dl=en&amp;hl=en&amp;q=global%20gdp">annual global GDP</a> estimated by the World Bank at $70 trillion.) However, it should be noted this is the “notional” or face value of such transactions and does not (because of netting or offsetting) represent the market value, but is nonetheless staggering.</p>
<h2>So what went wrong?</h2>
<p>Earlier this year, as a result of a UK parliamentary inquiry, it was revealed that in 2008, <a href="http://www.guardian.co.uk/business/2012/jul/13/tim-geithner-mervyn-king-libor">US and UK regulators suspected</a> Barclays Bank had been submitting lower values than would be expected for its estimates of LIBOR during the height of the Bear Stearns crisis in August 2007. Why would Barclays do that? Always remembering that LIBOR represents what a bank thinks it’s own likely borrowing costs will be, by low-balling the bank will give the impression that it is safer that it may actually be. It is an act of bravado! Barclays denied any wrongdoing.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" srcset="https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=853&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=853&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=853&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=1072&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=1072&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=1072&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former Barclays chief Bob Diamond denied wrongdoing but had to resign.</span>
</figcaption>
</figure>
<p>Believing that rates are being manipulated is one thing, proving it is another. In 2008, the Bank for International Settlements (BIS) published the results of a <a href="http://www.bis.org/publ/qtrpdf/r_qt0803g.pdf">study</a> into questions around interbank rate fixing. The regulator’s study concluded while there was a wider range of estimates between banks than would be expected, LIBOR “worked as intended”. Though disputed by some experts, in particular the Wall Street Journal, the BIS view was <a href="http://www.imf.org/external/pubs/ft/gfsr/2008/02/pdf/text.pdf">endorsed</a> by no less than the IMF.</p>
<h2>Enter the whistleblower</h2>
<p>In an <a href="http://www.independent.co.uk/news/business/news/whistleblower-the-culture-ultimately-comes-from-the-top-7920812.html">interview</a> with the Independent newspaper, an anonymous whistleblower stated borrowing rates had been manipulated in 2008 and that senior management, including Bob Diamond, the abrasive boss of Barclays, would have known. </p>
<p>Coupled with the <a href="http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf">announcement of a fine from the Financial Services Authority (FSA) </a> for inappropriate LIBOR submissions, this was curtains for Diamond, who having fronted a parliamentary committee claiming no knowledge of the practice of fixing LIBOR, was forced to resign.</p>
<p>Barclays Chairman Marcus Agius also resigned, preceded by Chief Operating Officer, Jerry del Missier, who had admitted to the parliamentary inquiry that manipulation had taken place but, in a novel defence, claimed Paul Tucker, the Deputy Governor of the Bank of England, had encouraged him to do it. Tucker denied this, but the controversy subsequently stymied his chances of replacing Sir Mervyn King as the Governor.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" srcset="https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=413&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=413&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=413&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=520&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=520&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=520&amp;fit=crop&amp;dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Deputy BoE Governor Paul Tucker denied telling Diamond to rig the LIBOR.</span>
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</figure>
<h2>Enter the emails</h2>
<p>In reporting its fine for Barclays, the FSA documented numerous emails and phone calls from Barclays traders to submitters requesting low or high submissions should be made (depending on the need to raise or lower rates).</p>
<p>One egregious example sums up the casual way that business was conducted. In 2006, a Barclays trader received an email from an external trader requesting a lower submission on 3 months USD LIBOR, “If it comes in unchanged I’m a dead man”. Later in the day, obviously happy, the external trader emailed, “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.</p>
<p>Potentially many hundreds of thousands of loans were made at rates that were too high and as a result businesses and borrowers may have paid millions - even billions - <a href="http://www.huffingtonpost.com/2012/07/13/gary-gensler-libor_n_1672197.html">too much for their loans</a>. All the while, the banks involved reported billions in profits and gave millions in bonuses to individual traders.</p>
<h2>What next?</h2>
<p>In September this year, Martin Wheatley, soon to be head of the new UK Financial Conduct Authority (FCA) published a report into the LIBOR scandal. The report concluded the current system should remain substantially unchanged but with additional regulations put in place and new criminal sanctions be introduced for market manipulation. The report also recommended the LIBOR process be taken away from the BBA.</p>
<p>Along with the GFC, <a href="http://www.guardian.co.uk/business/2011/may/05/how-ppi-scandal-unfolded">PPI scandal</a> and money laundering outrages, the LIBOR scandal is yet another example of the banking industry breaching the trust placed in it by its customers and the general public. The Economist - not usually known for biting the financial hand that feeds it - calls the LIBOR scandal the “<a href="http://www.economist.com/node/21558281">rotten heart of finance</a>”.</p>
<p>When the trust we hold in our banks breaks down, we have no option but to ask our politicians to reinstitute the integrity of the banking system. We await their response.</p><img src="https://counter.theconversation.com/content/11358/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Imagine if we discovered that the monthly setting of the Reserve Bank of Australia’s cash rate was rigged. There would quite rightly be outrage. We trust the RBA Board to make these calls, month after…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.